Bank of Israel Holds Rates Amid War-Driven Uncertainty

Bank of Israel Holds Rates Amid War-Driven Uncertainty

Bank of Israel has decided to maintain its interest rate at 4.5% for the fourth consecutive session, extending a pause that could persist for several months. This decision comes amid escalating concerns over ongoing conflicts with regional militant groups Hamas and Hezbollah.

On Monday, the Bank of Israel’s monetary committee met expectations by keeping the benchmark rate unchanged at 4.5%. This decision aligned with the consensus forecast among Bloomberg’s surveyed economists. Policymakers largely reiterated their previous stance, offering no clear indication of future moves.

Economic Projections and Inflation

Accompanying their decision, the central bank released updated economic forecasts. The projections from the research department now anticipate higher inflation for the current year compared to April’s predictions. Additionally, they forecast reduced economic growth. The outlook also suggests a more aggressive rate path, with the key rate expected to be at 4.25% by the second quarter of 2025. Governor Amir Yaron noted that officials now foresee a protracted conflict, potentially extending until early 2025.

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Escalating Conflict and Economic Impact

With Israel’s conflict with Hamas stretching into its 10th month, the risk of an expanded confrontation with Iran-backed Hezbollah in Lebanon looms large. Cease-fire negotiations in Gaza have resumed. Meanwhile, Prime Minister Benjamin Netanyahu’s administration is bracing for the potential of a broader war with Hezbollah forces in Lebanon.

The evolving security situation is crucial for the central bank’s strategy. Since the onset of the war in October. The bank has assessed that the economic repercussions would gradually subside over the year. However, policymakers have adopted a more cautious approach after an initial quarter-point rate cut at the beginning of the year.

An intensification of hostilities along the northern border with Lebanon could have several impacts. It could exacerbate the shekel’s depreciation. It could also cause supply chain disruptions and increase fiscal strain. These effects would collectively heighten inflationary pressures.

Government Spending and Budget Deficit

The conflict has already led to a significant rise in government spending, pushing Israel towards one of its largest budget deficits in recent history. Finance Ministry data released on Monday showed that the 12-month trailing fiscal deficit soared to 7.6% of GDP by June. This surpassed the government’s projected 6.6% shortfall for the entirety of 2024.

The Bank of Israel is navigating a tumultuous landscape of war and economic instability. Its cautious approach reflects the complexities of balancing monetary policy with the unpredictable nature of the ongoing conflict. The central bank’s decisions in the coming months will be pivotal in steering the country’s economy through these challenging times.

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