Bank of Israel/ Wikipedia
On Monday, the Monetary Committee of the Bank of Israel announced that it has decided to leave the interest rate unchanged at 4.5 percent. Usually, a national bank will raise the interest rate if it feels the economy is too hot or when there is inflation. A bank will cut rates when there is a recession in order to stimulate the economy. By not cutting the rate the Bank made an implicit statement that Israel’s economy does not need a stimulus right now.
In explaining its decision, the Bank said that the recovery of economic activity in Israel moderated in the second quarter of 2024. Supply constraints are making it difficult for activity to converge to the trend that characterized the economy prior to the war, and the extent of continued geopolitical uncertainty is reflected in the economy’s high risk premium.
Inflation and one-year inflation expectations are around the upper bound of the target range, and expectations for the second year and forward are within the target range, in its upper portion.
Also, the moderation of inflation of the nontradable components of the CPI was halted.
Since the previous monetary policy decision, the shekel weakened by about 1.3 percent against the dollar and the euro, and by about 1 percent in terms of the nominal effective exchange rate, with high volatility in the market.
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The Bank of Israel’s Research Department’s assessment is that GDP will grow by 1.5 percent in 2024 and 4.2 percent in 2025. These rates are 1.3 percent lower, cumulatively, than the April forecast. There is considerable uncertainty regarding developments in the war, which may have a material impact on the forecast.
In the housing market, reported the Bank, home prices and new mortgage borrowing continue to increase. Activity in the construction industry is recovering gradually, but constraints on such activity in view of the war remain significant.
In addition, the trends of global inflation indicate continued convergence toward the target ranges, but at a slower pace than in previous forecasts since the beginning of the year. In view of this, the major central banks continue to signal to the market that they will not hesitate to leave interest rates at restrictive levels over time.
In view of the continuing war, the Bank of Israel’s Monetary Committee’s 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 the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.
