The Bank of Israel’s Monetary Committee decided Wednesday (August 28) to leave the interest rate unchanged at 4.5 percent “in view of the continuing war.”
The Monetary Committee said its policy is focused on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity.
“Since the outbreak of the war, and in recent months in particular, geopolitical uncertainty and its economic ramifications have increased,” the Bank said. “These, alongside the fiscal uncertainty, are also reflected in the high yield spreads between Israeli government bonds and US bonds, and in CDS spreads that are near record levels.
The level of economic activity is lower than the trend line and even lower than its level in the corresponding quarter of 2023, and is greatly impacted by supply limitations.”
The inflation environment has been on an upward trend in recent months. The CPI increased by 0.1 percent for June and by 0.6 percent for July.
The inflation rate over the past 12 months is 3.2 percent, slightly above the upper bound of the target. Net of energy and fruit and vegetables, inflation is at a year over year pace of 2.8 percent.
Inflation expectations for the coming year have increased and are around the upper bound of the target.
Forecasters projected that annual inflation will remain above the upper bound of the target range in the coming months, will increase in the beginning of 2025 (among other reasons due to the expected increase in VAT), and will then moderate to around the upper bound of the target rate in the middle of 2025.
The risks for a possible acceleration in inflation include geopolitical developments and their impact on economic activity, shekel depreciation, prolonged supply limitations on activity, and fiscal developments, the Bank said.
Since the previous interest rate decision, the shekel has remained unchanged against the dollar, and weakened by about 3 percent vis-à-vis the euro, and by about 1.4 percent in nominal effective exchange rate terms.
The cumulative deficit in the government budget in the past 12 months continued to increase in July, totaling 8.1 percent of GDP. “To the extent that there won’t be additional unexpected additions to the defense budget, it is expected to be 6.6 percent at the end of 2024,” the Bank said.
