Author: Steven Scheer
JERUSALEM (Reuters) – The Bank of Israel is expected to leave short-term interest rates unchanged at its eighth straight policy meeting this week, although analysts believe a rate cut at its next meeting in late February is possible if inflationary pressures ease.
Of 13 economists polled by Reuters, 12 said they expected the central bank to keep the benchmark rate at 4.5 percent when the decision is announced at 4 p.m. (1400 GMT) on Monday. One predicted a quarter-point cut to 4.25%.
Driven largely by supply problems, Israel’s annual inflation rate accelerated to a 10-month high of 3.6% in August, but has since fallen to a four-month low of 3.4% in November.
That trend looks set to reverse somewhat, especially in January after a number of costs rose – including a 1 point increase in value added tax (VAT) to 18%, increases in other taxes and increases in electricity, water and food prices will bring the rate inflation close to 4%.
“We are a long way from the next tapering, as the Bank of Israel is likely to require convincing evidence of a slowdown in inflation before restarting the cutting cycle,” said Goldman Sachs economist Johan Allen.
But after January, inflation expectations are expected to fall and this could allow the central bank to reduce its reference rate.
“In the second half of February, breakthrough inflation will fall,” he said Bank Hapoalim (TASE:) Chief Economist Victor Bahar.
“I would say there’s a good chance” of a rate cut at the Feb. 24 meeting, he said.
In keeping rates steady on Nov. 25, the central bank cited high inflation as military conflict kept economic growth weak.
Israel has since reached a truce with Hezbollah in Lebanon, while its war in Gaza has become far less intense following an attack by the Palestinian Islamist group Hamas on October 7, 2023 despite 100 hostages remaining in Gaza.
The Houthis have been firing missiles from Yemen almost daily, but overall, Israel’s risk premium – a key concern of the Bank of Israel – has improved significantly, and it has also strengthened against the dollar in recent months.
It may still be too early for a rate cut, said Yonie Fanning, chief strategist at the Mizrahi Tefahot (TASE:) Bank.
“As it stands right now, putting it off another month and a half seems like a better idea,” Fanning said. “The bigger risk for the central bank is the loss of control over prices.”
He noted that keeping rates high will not affect supply or the level of competition in the business sector, which is currently pushing prices up. “But they will tame consumer demand and ultimately anchor inflation,” he said.
Along with the rate decision, the central bank will also release updated economic estimates for 2025, while Governor Amir Yaron will hold a press conference on Monday at 4:15 p.m.
The bank’s economists currently estimate economic growth of 3.8% in 2025 and an inflation rate of 2.8%, within the government’s annual target of 1-3%.
