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The Monetary Committee of the Bank of Israel decided to leave the interest rate unchanged at 4.5 percent. In announcing the decision, the Bank said that since the outbreak of the war in Gaza, and in recent months in particular, geopolitical uncertainty and its economic ramifications have increased.
The level of economic activity is lower than the trend line and even lower than its level in the corresponding quarter of 2023 and is greatly impacted by supply limitations.
These, alongside the fiscal uncertainty, are also reflected in the high yield spreads between Israeli government bonds and US bonds, and in CDS spreads that are near record levels, said the Bank.
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In addition, inflation has been on an upward trend in recent months and is slightly above the upper bound of the target range. The rise in the inflation rate primarily reflects the increase in the rate of change in prices of the non-tradable components.
Since the previous interest rate decision, the shekel has remained unchanged against the dollar and has weakened by about 3 percent vis-à-vis the euro and by 1.4 percent in nominal effective exchange rate terms.
In the housing market, home prices and new mortgage volume continue to increase. The constraints on activity in the construction industry, in view of the war, are still significant, and construction industry activity is recovering slowly.
In the labor market, there is a labor supply constraint due to the impact of the war, and there has been an increase in the number of job vacancies and a decline in the unemployment rate.
Worldwide, economic activity continues to expand, the inflation rate is moderating, and the markets are expecting several interest rate reductions over the course of the year by the Fed and the ECB.
“In view of the continuing 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 convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.”
Global economic activity remains resilient, said the Bank. While the U.S. economy continues to demonstrate strength, concerns of a recession have subsided. In the Eurozone, despite a surprising uptick in second-quarter growth, Germany’s economic weakness is expected to weigh on overall activity in the third quarter. China’s second-quarter growth fell short of expectations, and signs of sluggishness persist into the early part of the third quarter. Investment houses’ global growth forecasts for 2024-25 remain largely unchanged.
The global Purchasing Managers Index for July indicates moderate expansion in economic activity, with services sector activity accelerating while manufacturing remains in a state of moderate contraction. World trade volume increased slightly in June, recovering from a minor decline in May.
On the inflation front, the U.S. saw a significant moderation in second-quarter inflation compared to the first quarter. The overall Consumer Price Index (CPI) decreased to 2.9% in July, and the core rate also softened to 3.2%. In the Eurozone, inflation rose slightly to 2.6% in July, while the core CPI remained unchanged at 2.9%.
Both the Federal Reserve and the European Central Bank maintained their monetary interest rates in their most recent decisions. However, expectations for interest rate reductions have grown, and the U.S. Federal Reserve Chair signaled a potential start to rate cuts at the Jackson Hole meeting.
