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The Bank of Israel Leaves Interest Rate Unchanged at 4.75 Percent

bank of Israel

Bank of Israel/ Wikipedia

On Monday, the Monetary Committee of the Bank of Israel revealed, in a surprise move, to leave the interest rate unchanged at 4.75 percent. Considering the adverse effect the Iron Swords War in Gaza is having on Israel’s economy – virtually no tourism, hundreds of thousands of Israelis left their jobs to perform military reserved duty, etc. – the Bank might have decided to cut the rate to stimulate the economy.

However, considering the current circumstances a rate cut might not have made any difference.

Also, over the past two weeks, the Shekel rebounded against foreign currencies and returned to its pre-war value against the US Dollar. In the first few weeks after the October 7 attack, the Shekels lost more than 6% of its value against the USD, fell to below the 4 Shekels to the Dollar mark and hit an eight year low. Expectations were that it would slide even further, but on Monday it was trading at 3.71 Shekels to $1.

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The BOI did acknowledge that the war is having significant economic consequences, both on real economic activity and on the financial markets.

“There is great amount of uncertainty with regard to the expected severity and duration of the war, which is in turn affecting the extent of the impact on activity,” it said. But it also added “The Israeli economy is strong.

“In the past,” said the Bank, “it has demonstrated its ability to recover from difficult periods. The various economic indicators since the beginning of the war have, as expected, pointed to a decline in economic activity, but after a few weeks of war, it seems that the economy is recovering in some components of activity.”

Governor of the Bank of Israel Amir Yaron said of the decision to leave the rate unchanged that “Israel’s economy is robust and stable. It has known how to recover from more than a few difficult periods in the past and to return rapidly to prosperity.”

“The Monetary Committee discussions that were held over the past 2 days naturally focused on the economic impacts of the war,” he added. “The Monetary Committee analyzed the various processes and their impact on economic activity and on inflation, and at the end of the discussions the Committee decided to leave the interest rate unchanged

Yaron explained that Israel’s economy has certain “growth drivers” he said are able to adjust to various situations, including innovation and technology.

There were a number of factors also cited by the Bank of Israel for the decision to leave the interest rate unchanged.

Inflation, for example, moderated, but is still above the target range. The BOI said inflation expectations and forecasts are within the target range.

However, the Bank of Israel Research Department also lowered its growth forecast, and in its estimation, GDP will grow by just 2 percent in each of 2023 and 2024. The forecast features an especially high level of uncertainty, and includes the assessment that government expenditures due to the war will total about NIS 160 billion. The debt-to-GDP ratio is expected to be 63 percent in 2023, and 66 percent in 2024, said the Bank.

The volume of activity in the housing market continues to moderate, and the industry is experiencing difficulties as a result of the war. In the past 12 months, home prices have declined by 0.2 percent. The owner-occupied housing component declined by 0.3 percent, and its annual rate of increase continued to moderate, to 4.9 percent.

In the credit market, there is a slowing trend of bank credit to small and micro businesses. The Bank of Israel has activated a number of targeted policy tools to support the process of providing credit to this segment.

In view of the war, the Monetary Committee said its policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with developments in the war and the uncertainty derived from it. Insofar as the recent stability in the financial markets becomes entrenched and the inflation environment continues to moderate toward the target range, monetary policy will be able to focus more on supporting economic activity.

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