Bank of Israel/ Wikipedia
The Bank of Israel on Monday said that its Monetary Committee decided to leave the interest rate unchanged. The rate will remain at 4.5%.
The decision not to raise the rate can be taken as a good sign, meaning that inflation is in check and has not gotten worse. At the same time, the decision not to cut the rate means that there are still concerns about inflation; however, the decision also means that the Bank of Israel does feel the economy is slow and in need of the stimulation that a rate cut would bring.
“In view of the war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity,” said the Bank of Israel. “The interest rate path will be determined in accordance with the continued convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.”
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In announcing the decision, the Bank of Israel explained that in Israel economic activity and the labor market continue to recover gradually, after the setbacks suffered last fall in the wake of the October 7 Hamas terror massacre and the ensuing war in Gaza. However, alongside this, continued geopolitical uncertainty is reflected in the economy’s high risk premium.
The Bank did acknowledge that there has been some increase in the inflation environment. Inflation over the past 12 months was 2.8%. Inflation expectations and forecasts from the various sources for the coming year increased, and are around the upper bound of the target range. Expectations for the second year and forward are within the target range, in its upper portion.
Since the previous monetary policy decision, the shekel strengthened by about 1.1% against the US Dollar and the Euro, and by about 1.2% in terms of the nominal effective exchange rate.
Also, Israel’s GDP expanded by 3.35% in the first quarter of 2024, compared with the previous quarter, and, said the Bank of Israel, “reflects growth in private consumption and in fixed capital formation.”
Despite this expansion, GDP remains 2.8% lower than its prewar level.
In the housing market, home prices continue to increase and the constraints and difficulties in the industry’s activity in view of the war remain significant. The housing component of the CPI increased by 0.6 percent, and the pace of annual increase is 2.7%.
The Bank of Israel also stated that the global economy continued to expand in the first quarter of 2024, that inflation remains above central bank targets, and that there was an increase in the interest rate path expected by the markets.
