As forecast, in its decision announced today, the Bank of Israel has kept its interest rate at 4.5%. This is the third successive time that the Bank of Israel has left the interest rate unchanged. Analysts expected the decision, in the light of the inflationary pressures seen in the past few months, as well as the geo-political uncertainty weighing on the Israeli economy.
One of the reasons for keeping the interest rate unchanged is the rise in the rate of inflation, which was running at an annual 2.8% in April. The banks and investment houses expected the annual rate of inflation to fall to 2.5%, and the surprise in the Consumer Price Index led many economists to estimate that inflationary pressures will be with us for months to come.
"There has been some increase in the inflation environment. Inflation in the past 12 months is 2.8 percent. Inflation expectations and forecasts from the various sources for the coming year increased, and are around the upper bound of the target range. Expectations for the second year and forward are within the target range, in its upper portion," the Bank of Israel Monetary Committee stated in its interest rate announcement today." The committee stresses that "In view of the war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with the continued convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy."
The Phoenix Holdings chief economist Matan Shitrit says, "The forecasters’ estimates for inflation in the coming year have been revised upwards, with the Consumer Price index reading for May now expected to be a rise of 0.5%, bringing the annual rate of inflation to 3.1%. As expected, the Bank of Israel kept its interest rate unchanged, despite the fact that economic activity data indicate that there is still some way to go before the Israeli economy recovers fully. The bank continues to put the emphasis on geopolitical uncertainties and inflationary pressures that are rising daily.
"In the light of the renewed acceleration in inflation, a question that has frequently been asked recently is, why doesn’t the Bank of Israel raise its interest rate? While it’s true that inflation is rising, a large part of the rise is a result of factors on the supply side (a shortage of manpower, scarcity of flights, high shipping prices, and so on), and the Bank of Israel can have no impact on the supply side by means of the interest rate tool.
"Moreover, the decision makers at the Bank of Israel stress the real interest rate, which will continue to be in the contractionary region even at the current inflation rate and at the rate forecast for the year ahead. So, in our view, only in a scenario in which we see inflation accelerating more rapidly to high levels, or if the risks continue to increase (higher levels in the measures of Israel’s risk premium) will the Bank of Israel start to discuss an interest rate hike."
Published by Globes, Israel business news - en.globes.co.il - on May 27, 2024.
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