(Bloomberg) — Israel’s central bank left interest rates unchanged as it anticipates more inflationary pressure stemming from the country’s multi-front war against Iran-backed militias.
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The Bank of Israel kept its beast case rate at 4.5% on Monday, in line with the estimates of all but one of 14 analysts in a Bloomberg survey. The outlier predicted a cut of 25 basis points.
The central said it sees interest rates at 4%-4.25% in the next 12 months. It revised up its 2025 economic-growth estimate to 4% from 3.8%, and for last year to 0.6% from 0.1%.
“In view of the continuing war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity,” it said in a statement.
With military call ups causing labor shortages and many airlines no longer flying to Israel, inflation has accelerated to 3.4%, above the government’s target of 1% to 3%.
“The interest rate path will be determined in accordance with the convergence of inflation to its target,” the Monetary Committee added.
Governor Amir Yaron has previously said monetary easing is probably off the table until the second half of 2025.
Israel’s economy has been hit since the conflict began with Hamas’ attack in October 2023 and gross domestic product grew more slowly than for most other developed nations last year.
But the central bank’s refrained from more cuts following its last one at the beginning of 2024, citing concern over market stability and increased government spending to fund the war effort.
Inflation may accelerate before falling back to target range. That’s mainly due to a 1% rise in value-added tax on Jan. 1, part of a 40-billion-shekel ($11 billion) fiscal plan aimed at lowering the budget deficit this year to about 4.5% of GDP from almost 8% in 2024. Water and power prices, as well as property taxes, have also increased, adding to immediate inflationary pressures.
Talk of a potential rate hike has died down in the past two months, largely due to the government’s fiscal tightening and the shekel appreciating since November, around the time as a truce with Hezbollah in Lebanon began.
In the last quarter of 2024, the shekel was the best-performing currency in a basket of expanded majors tracked by Bloomberg. Prices for Israel’s credit-default swaps — used by some bond traders to hedge against a default — fell sharply, as did shekel bond yields.
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