Israel central bank unlikely to cut rates again in 2024, deputy governor says

9:56 pm Thursday, August 29th, 2024

JERUSALEM (Reuters) – The Bank of Israel is unlikely to lower short-term interest rates at its remaining two 2024 policy meetings given rising price pressures and persisting geopolitical risk, deputy governor Andrew Abir said on Wednesday.

The central bank earlier held its benchmark interest rate at 4.5% for a fifth-straight decision, citing worries over inflation that has risen to a 3.2% rate while the Gaza war rages on with fears of an expansion to a regional conflict.

The bank had eased 25 basis points in January but has held rates steady since.

“It’s unlikely for us to be cutting rates until well into 2025,” Abir told Reuters, noting that the decision remains data-dependent.

“As long as the uncertainty around the war (and) the dislocation in various key industries carries on, it’s difficult for us to be able to reduce interest rates.”

Policymakers next decide on rates on Oct. 9, followed by Nov. 25 and Jan. 6, 2025.

Israel’s inflation rate is expected to move above 3.5% in the coming months, partly due to a planned rise in the value-added tax at the start of 2025, before easing back into its 1%-3% target range in the second half.

“You have to see progress being made on inflation coming back down into the target range,” Abir said. “We know it’s going to go up … we want to see that after that it starts to come down.”

Much of the inflation, he said, is coming from the supply side such as a shortage of workers, for reasons including no Palestinians being allowed to enter Israel, other workers getting called up for military service and Israelis being displaced in the north due to daily Hezbollah rockets.

“The war has carried on longer than we anticipated … and is creating shocks in the real economy. You are seeing investments, particularly in construction, go down quite sharply,” Abir said.

Lowering rates now, he added, would widen the gap between demand and supply and lead to price increases, particularly in housing costs – even as the economy grew by just an annualised 1.2% in the second quarter. At the same time, investors demand a higher rate of return during a period of uncertainty and geopolitical risk.

“If you’re lowering interest rates in that environment, then you’re going against what they’re looking for. And you could actually exacerbate that, and would normally see that in terms of a depreciation of the currency,” he said.

The shekel has been volatile of late but has gained 3% against the dollar this month on a belief that an all-out war with Hezbollah or Iran was likely, while the Federal Reserve is likely to lower U.S. rates in September.

Fiscal policy is also a factor with the war boosting the budget deficit and the central bank frustrated that the government has been dragging its heels on creating a credible 2025 state budget that will require spending cuts to non-growth areas and tax increases.

“Because of the fiscal situation, that leads us to being more cautious and conservative about monetary policy,” Abir said. “And we think a higher level of interest is needed in order to keep the economy and markets stable.” 

(Reporting by Steven Scheer; editing by Philippa Fletcher and Rod Nickel)