Isranomics

Bank of Israel Holds Interest Rate Amidst Economic Recovery and Inflation Concerns

by | Apr 8, 2024 | Economy | 0 comments

The Bank of Israel opted to maintain the country’s interest rate at 4.5%, citing a split among senior economists and various economic indicators influencing the decision-making process.

The decision came amidst a backdrop of differing opinions among economists regarding the trajectory of the central bank’s interest rate. Initial estimates had suggested a 50% likelihood of the interest rate remaining unchanged. However, factors such as economic recovery signals, shekel depreciation, upward inflation expectations, and the Federal Reserve’s distancing from rate cuts weighed on the minds of policymakers.

While some experts argued for a rate cut, pointing to inflation within the Bank of Israel’s price stability target and the need to stimulate economic growth further, others expressed concerns about potential inflationary pressures. Recent data showed a slowdown in inflation rate increases, with the consumer price index rising by a modest 0.4% in February compared to earlier expectations. Nevertheless, core inflation remained low, hovering around 2.4%.

Market dynamics also played a significant role in the decision-making process. Despite earlier expectations of a rate cut, the likelihood dwindled in the lead-up to the decision. One pivotal factor was the performance of the shekel, which weakened considerably in response to a stronger US dollar. A rate cut could have exacerbated this trend due to interest rate differentials between Israel and the US.

Additionally, signs of economic recovery provided further justification for maintaining the interest rate. Recent data, including the Bank of Israel’s Combined Index for February, indicated a gradual rebound from the economic fallout. Components such as production, employment, and import/export figures showed improvement, with estimates for previous months also revised upwards.

Commenting on the decision, Yonatan Katz, Chief Economist at Leader Capital Markets, highlighted the complexities involved, noting concerns about fiscal policy expansion, currency volatility, and geopolitical uncertainty. Uri Greenfeld, economist and chief strategist at Agam Lider, echoed these sentiments, emphasizing the potential inflationary impact of post-war tax measures and stagnant construction activity that may put pressure on rental prices, which is a key component in the price index.

Main article photo: The Bank of Israel building Jerusalem. (Reuters/Ronen Zvulun)

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