The Bank of Israel has maintained the interest rate at 4.5%, marking the third consecutive time this year that the central bank has opted to leave the rate at current levels. This decision aligns with the predictions of leading economists, who anticipated no change on this front due to ongoing inflationary pressures and geopolitical uncertainties impacting the Israeli economy.

Following the announcement, the Bank of Israel cited several risks that could potentially accelerate inflation. These include geopolitical developments affecting economic activity, the devaluation of the shekel, persistent supply constraints in the construction and aviation sectors, fiscal changes, and global oil price fluctuations.

Inflation is a primary concern. As of April, the annual inflation rate reached 2.8%, contrary to the expectations of banks and investment houses, which had forecasted a decline to 2.5%. The unexpected increase has led many economists to predict continued inflationary pressures in the upcoming months.

Ronan Menachem, in an interview with Globes, highlighted that the annual index rate is nearing 3%, with market predictions suggesting the May index might push inflation above the Bank of Israel’s target to 3.1%. This trend contrasts with the moderating inflation rates observed in the US and Europe. Europe is poised for an interest rate cut as early as June, while the US awaits further reductions in price levels before making any adjustments.

According to experts, the May price index is anticipated to rise by about 0.5%. Notable contributors to this increase include the food sector, with rising prices of supervised dairy products, summer fruits, housing, health, recreation, transportation, and communication, driven by higher fuel costs and increased travel expenses.

Despite the rise in inflation, the Bank of Israel’s decision to keep the interest rate unchanged was expected, considering the current economic activity data. Matan Shetrit, chief economist of the Phoenix Group points out that while the combined index and GDP indicate a slow recovery of the Israeli economy, geopolitical uncertainties and inflationary pressures remain significant concerns.

Shetrit further explains that a significant portion of the inflation surge is attributed to supply-side issues, such as labour shortages, rising prices of plane tickets due to limited flights, and high transportation costs. These are areas where the central bank’s interest rate adjustments have limited impact.

In conclusion, the Bank of Israel is likely to consider raising interest rates only if inflation accelerates more rapidly or if risk levels, as indicated by risk premium indices, continue to climb. For now, the central bank’s focus remains on navigating the complex interplay of inflationary pressures and geopolitical uncertainties to support the steady recovery of the Israeli economy.

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