JERUSALEM (Reuters) – The Bank of Israel will hold the line on short-term interest rates for a fourth straight meeting next week and perhaps until 2025 because of the war in Gaza, sticky inflation and a widening risk premium, a Reuters poll showed.
All 15 economists polled said they expected the central bank to hold its benchmark rate at 4.5% when the decision is announced on Monday at 4 p.m. (1300 GMT).
The annual inflation rate held steady in May at 2.8%, coming in below the 3.2% forecast to remain within a 1-3% target. But it has edged up since it eased to a 2.5% rate in February.
“Persisting inflation pressures, geopolitical risks, currency weakness and fiscal expansion provide no room for the BOI (Bank of Israel) to ease,” said Morgan Stanley economist Alina Slyusarchuk.
“We see the base rate firmly on hold in July, all the way until late autumn and potentially longer.”
The monetary policy committee in January reduced its key rate by 25 basis points, which followed 10 straight rate hikes in an aggressive tightening cycle from an all-time low of 0.1% in April 2022, before a pause last July.
The war has raged since gunmen from the Palestinian Islamist group Hamas stormed Israel on Oct. 7.
Ofer Klein, head of economics and research at Harel Insurance and Finance, said continued high geopolitical uncertainty, which is reflected in the high the risk premium measured in Israel’s government bond yield spreads, supports leaving the interest rate unchanged.
After a steep contraction in the October-December period, the economy rebounded an annualised 14.4% in the first quarter from the prior three months – a sign there was no pressing need to ease monetary policy.
Bank of Israel Governor Amir Yaron told Reuters after the prior decision in late May that further rate cuts would be tough as long as inflation pressures persist and Israel’s war against Hamas fuels uncertainty and drives up government spending.
The budget deficit – on the heels of higher defence costs – has surged to 7.2% of gross domestic product, above a 2024 target of 6.6%.
At the same time, there are fears of a second war between Israel and Iran-backed Hezbollah on the Lebanese border – keeping Israel’s risk premium high and the shekel jittery. Hezbollah has been firing rockets into Israeli towns in solidarity with Hamas and Israel has been hitting back.
In addition to the rates announcement, the Bank of Israel on Monday will also publish updated macroeconomic estimates and Yaron will hold a news conference at 4:15 p.m. (1315 GMT).
“We believe that in the updated forecasts the bank will continue to signal that it does intend to reduce the interest rate in the next 12 months,” Klein said, “but will also emphasize the issue of fear of the risk premium”.
Source: Economy - investing.com
