The Bank of Israel confirmed on Monday that the country's key interest rate will remain steady at 4.75%, aligning with expert forecasts. This marks the second consecutive time that the Bank has opted to keep interest rates unchanged, following a series of 10 consecutive hikes starting in April 2022.
As noted, the decision is in line with the expectations of leading economic experts in Israel, who had anticipated that the interest rate would hold steady at 4.75% due to recent signs of moderation in inflation within the country. A noteworthy indication of this was the July consumer price index, which revealed a welcomed decrease in Israeli inflation from 4.2% to 3.3% — a larger decline than the estimated rate of 3.4%.
“Economic activity in the Israeli economy is at a high level and is accompanied by a tight labor market, although there is some moderation in a number of indicators,” stated the Bank of Israel in its announcement.
“Inflation is still horizontal and is at a high level. However, in recent months there has been a slowdown in inflation. Therefore, the committee decided to leave the interest rate unchanged,” it continued, going on to warn that there is “a significant possibility of continuing to raise the interest rate in its next decisions, in the event that the inflation environment does not continue to moderate as expected."
“The interest rate path will be determined according to the activity data and the development of inflation, in order to continue to support the achievement of the policy goals,” the bank concluded.
According to Yonie Fanning, chief strategist at Mizrahi-Tefahot Bank, for a while it didn’t seem as though the BOI’s repeated interest rate increases were making much of an impact.
“From a local point of view, for a long time there was no substantial reaction of the local consumer to the increase in interest rates, at least when looking at the dry statistics from a distance,” Fanning said. A closer look at recent data, though, reveals that some consumers are indeed feeling the pinch, leading to less spending — as illustrated in the “downward surprises in the June and July price indices,” as well as data from August which indicated a slowdown in the use of credit cards.
He concluded that upcoming data is likely to show that inflation in Israel is around 4%, as a result of technical factors, rising global oil prices, a weaker currency, and higher rental prices. The Bank of Israel raised its interest rate earlier this year to combat inflation, but it's expected to keep it steady until the end of October, which is a relatively long time. This extended period is likely to have a noticeable impact on the economy and statistics.
Unclear when the interest rate will drop
As for when the interest rate is expected to finally drop, Bank Leumi’s Chief Economist Dr. Gil Michael emphasized the importance of two primary factors. “The recent weakness of the Israeli shekel and rising global oil prices are expected to push inflation higher in the coming months,” he said. “This might lead to the possibility of further interest rate hikes or a delay in the first rate cut."
Other factors could cause a potential increase, he noted, such as if Europe or the United States take steps to control inflation by raising their rates. In such a situation, Israel might have to follow suit by raising rates again or waiting even longer to lower them.
The next decision on interest rates will be on October 23, 2023, with more data being made available before that. Inflation is expected by experts to stay at about 4%.
Earlier on Monday the Bank of Israel denied an Army Radio report that Governor Amir Yaron would announce his decision not to seek a second term. The Bank stated that he would make his decision around September-October, during the Jewish holiday season.
Amir Yaron's current five-year appointment as the Governor of the Bank of Israel expires at the end of the year.