The Bank of Israel is set to announce its decision on the interest rate next Monday, February 26, following a recent reduction of a quarter of a percent last month, bringing it down to 4.5%. The prevailing sentiment in recent weeks had leaned towards a wait-and-see approach before further adjustments. However, with the release of inflation data towards the end of the week, the tide seems to be turning, with an increasing number of economists now predicting another rate cut this month.

The shift in forecasts is primarily attributed to the latest inflation figures, which revealed an annual rate of 2.6%. This data suggests that price increases in Israel have stabilized, firmly aligning with the target range of 2-3%. Notably, without the impact of rising fruit and vegetable prices, inflation stands at a more modest 2.2%. Alex Zabezhinsky, Chief Economist at Meitav, underscores the strengthening and broadening decline in inflation since the onset of recent events.

Adding to the case for further monetary easing are the GDP figures for 2023, which indicate a significant 20% contraction in growth during the fourth quarter of the year. This downturn has bolstered the argument for an injection of stimulus from the Bank of Israel to spur economic recovery. Zabezhinsky predicts continued interest rate cuts this month, a sentiment echoed by financial giant Goldman Sachs, which anticipates a reduction to 4.25%.

The performance of the shekel exchange rate also factors into these projections. Despite initial volatility amid recent events, the shekel has rebounded and currently stands at 3.64 shekels to the dollar, surpassing pre-October levels. Zabezhinsky highlights that concerns regarding threats to financial stability have not materialized, with even credit rating agency Moody’s downgrade failing to disrupt local markets.

However, not all experts are aligned in their forecasts. Modi Shafrir, chief financial markets strategist at Bank Hapoalim, suggests a high likelihood of the interest rate remaining unchanged, with a potential reduction to 4.25% slated for April. Shafrir cites the bank’s anticipation of limited concessions and forecasts from the Bank of Israel’s research division, which project an interest rate of 3.75%-4% in 2024.

Furthermore, Shafrir points to cautious statements from Bank of Israel Governor Prof. Amir Yaron regarding the pace of interest rate reductions, citing ongoing geopolitical tensions and the potential for escalation with Hezbollah. Rapid rate cuts raise concerns about the interest rate gap between Israel and other Western nations, which could impact financial stability and the shekel’s value.

The global economic landscape also plays a role in shaping expectations. The delay in monetary easing by the US Federal Reserve and the Eurozone, coupled with unfavorable economic indicators in the UK, underscore the interconnected nature of monetary policy decisions worldwide.

As the Bank of Israel prepares to announce its decision, it faces a delicate balancing act between stimulating economic growth and maintaining financial stability amidst a backdrop of geopolitical uncertainty and global economic challenges.

Image credit: Bank of Israel Governor Amir Yaron (Noam Revkin Fenton, Flash90)