Israel’s central bank unlikely to cut rates again in 2024, deputy governor says By Reuters

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

The central bank previously kept its benchmark interest rate at 4.5 percent for a fifth consecutive decision, citing concerns over inflation rising to 3.2 percent as the war in Gaza continues with fears of expansion of a regional conflict.

The bank cut 25 basis points in January but has held rates steady since then.

“It is unlikely that we will cut rates until 2025,” Abir told Reuters, noting that the decision remains data-dependent.

“As long as the uncertainty surrounding the war (and) dislocation in various key industries continues, it is difficult for us to be able to cut interest rates.”

Policymakers next decide on rates on October 9, followed by November 25 and January 6, 2025.

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

“You need to see progress in getting inflation back to the target range,” Abir said. “We know it’s going to go up … we want to see it start going down after that.”

Much of the inflation, he said, comes from the supply side, such as a shortage of workers for reasons such as Palestinians not being allowed to enter Israel, other workers being called up for military service, and Israelis being displaced north from daily cause. Hezbollah rockets.

“The war has lasted longer than we anticipated … and it is creating shocks in the real economy. You notice that investment, especially in construction, is falling quite sharply,” Abir said.

Cutting rates now, he added, would widen the gap between supply and demand and lead to price increases, particularly in housing costs – even though the economy grew by just an annualized 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 lower interest rates in that environment, then you’re going against what they’re looking for. And you could exacerbate that and you would normally see that in terms of currency depreciation,” he said.

It has been volatile of late but has gained 3% against the dollar this month on the belief that an all-out war with Hezbollah or Iran is likely, while the Federal Reserve is likely to cut US rates in September.

Fiscal policy is also a factor as the war has widened the budget deficit and the central bank is frustrated that the government has dragged its heels in creating a credible state budget for 2025, which will require spending cuts in areas which are not increasing and tax increases.

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