By Steven Scheer
JERUSALEM (Reuters) – The Bank of Israel (BOI) will leave short-term interest rates next week for a third straight meeting and further rate reductions the rest of 2024 are in jeopardy due to re-emerging inflation pressures, a Reuters poll forecast.
All 15 economists polled said they expect the central bank to hold its benchmark rate at 4.5% when the decision is announced on Monday at 4 p.m. (1300 GMT).
The annual inflation rate continued to edge higher in April to 2.8% after easing to a 2.5% rate in February. It still remained with a 1-3% target.
“Since Governor Amir Yaron tends to act cautiously … he will wait until the picture of the inflation environment becomes clearer,” said Rinat Ashkenazi, chief economist of the Phoenix Investment House, also pointing to improved economic data, fiscal and security uncertainty and delays in U.S. rate cuts.
The monetary policy committee (MPC) in January reduced its key rate by 25 basis points, which followed 10 straight rate hikes in an aggressive tightening cycle from an all-time low of 0.1% in April 2022, before a pause last July.
Analysts, including the central bank’s own economists, had expected rates would fall about one percentage point in 2024 to as low as 3.75% – especially as Israel’s war against Palestinian Islamist group Hamas hit the economy hard in the fourth quarter.
The war has raged since Hamas gunmen stormed Israel on Oct. 7. Yet, after a steep contraction in the October-December period, the economy rebounded an annualised 14.1% in the first quarter from the prior three months.
At the same time, the budget deficit – on the heels of higher defence costs – has surged to 7% of gross domestic product, above a 2024 target of 6.6%.
“Expansionary fiscal policy, upside inflation surprises and persistent geopolitical risks mean that this is not a good time to think about easing. We don’t see rate cuts appearing on the BOI table before autumn this year,” said Morgan Stanley economist Alina Slyusarchuk.
Ahead of the last policy meeting on April 8, seven of the 12 economists polled had expected a quarter-point rate cut to 4.25%.
“Without significant downward surprises in inflation later this year and without a significant improvement in the geopolitical situation and a decrease in the economy’s risk premium, it appears that the window for reducing interest rates has closed at this stage,” said IBI Investment House chief economist Rafi Gozlan, who sees no more reductions the rest of this year as a “reasonable” scenario.
Minutes of the April decision showed that policymakers were uneasy about the extent of geopolitical uncertainty and that the BOI was “focused on stabilization of the markets and reduction of uncertainty, alongside price stability and support for economic activity”.
With the prospects of rate cuts waning, the shekel has appreciated to 3.66 per dollar – its strongest level since late March – after weakening to 3.80 a month ago.
(Reporting by Steven Scheer; Editing by Alex Richardson)
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