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The Monetary Committee of the Bank of Israel (BOI) decided on Monday to leave the interest rate unchanged at 4.75 percent. The BOI released the macroeconomic staff forecast formulated by its Research Department in October 2023 concerning the main macroeconomic variables—GDP, inflation, and the interest rate. This forecast was formulated in the midst of the “Swords of Iron” War, which broke out on October 7, 2023, with the cruel attack by terrorist organizations from Gaza.
The State of Israel is involved in a war after having been attacked just over two weeks ago, explained the BOI. The war is having various economic effects, both on real activity and on the financial markets. The Bank of Israel has taken a number of policy measures to deal with the situation. The financial markets are functioning, and a large part of economic activity is continuing as usual.
In view of the war, the BOI’s Monetary Committee said its policy is focusing on stabilizing the markets and reducing uncertainty, and it has activated a program to sell foreign exchange and to provide liquidity in the swap and repo markets. The interest rate path, and the use of additional monetary policy tools, will be determined in accordance with this purpose and with developments in the war, as well as with data on economic activity and the inflation dynamics, in order to continue supporting the markets’ stability and achieving the policy objectives and the needs of the economy.
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“Since the beginning of the war, the Bank of Israel has been holding ongoing assessments of the effect of the security situation on various economic and financial aspects, and have taken policy steps accordingly,” said BOI Governor Professor Amir Yaron. “I will expand on that a bit later on. Naturally, a notable portion of the Monetary Committee’s discussions held in the past two days focused on the economic effects of the war. The Monetary Committee analyzed the various processes and their effect on economic activity and inflation, and at the end of the discussions decided to keep the interest rate unchanged at 4.75 percent.”
The Governor went on to list the steps the bank has taken since the beginning of the war in the financial markets and in banking. With the outbreak of fighting, he explained, significant depreciation pressures were seen, which were reflected in early trading in foreign markets. So, on Monday October 9, before trading opened, it implemented a plan to sell up to $30 billion of foreign exchange and to put into operation Swap transactions totaling up to $15 billion. Within the framework of the program, the Bank is acting in the market to moderate the fluctuations in the value of the shekel and to supply the liquidity required to continue the orderly activity of the markets.
“We do not have a target exchange rate,’ he added. “But we do want to verify that there aren’t abnormal fluctuations and to ensure full and proper functioning of the markets in general, and the foreign exchange market in particular. “
The high level of the Bank of Israel’s foreign exchange reserves are at about $200 billion, which gives it space to act to achieve this target. An additional put into operation is the Repo transaction program, the goal of which is to supply shekel liquidity to institutional entities and to mutual funds against government and corporate bonds.
“Our interventions in the financial markets, together with the other monetary policy tools, work to stabilize the markets and maintain their continued orderly operation by reducing uncertainty for the economy and the public at this time,” he said.
As for the macroeconomic forecast, the BOI said “This period features a high amount of uncertainty with regard to the development of the war and its economic impacts. The forecast includes an assessment of the economic costs of the war based on the information available up to this point, assuming that the majority of the war will be concentrated on the southern front. The forecast naturally features a particularly high level of uncertainty, partly in view of the uncertainty with regard to the duration, scope, and nature of the war.”
