Written by Stephen Shear
JERUSALEM (Reuters) – The Central Bank of Israel is expected to leave short-term interest rates unchanged for the eighth straight meeting this week, although analysts believe a rate cut at the subsequent meeting in late February is possible if inflationary pressures ease.
Of 13 economists polled by Reuters, 12 said they expected the central bank to keep its benchmark interest rate at 4.5% when the decision is announced on Monday at 4 p.m. (1400 GMT). One predicted a quarter-point cut to 4.25%.
Israel's annual inflation rate, driven largely by supply issues, accelerated to a 10-month high of 3.6% in August, but has since retreated to a four-month low of 3.4% in November.
This trend looks set to reverse itself somewhat, particularly in January after a range of costs rose – including a one-point increase in VAT to 18%, increases in other taxes, and higher electricity, water and food prices which contributed worsening the crisis. The inflation rate will be close to 4%.
“We are some way away from the next cut, as the Bank of Israel will likely require conclusive evidence of moderation in inflation before resuming the cutting cycle,” Goldman Sachs economist Johan Allen said.
But after January, inflation expectations are expected to decline and may allow the central bank to ease interest rates.
“In the second half of February, inflation will decline,” he said. Bank Hapoalim (TASE:) Chief Economist Victor Bahar.
“I would say there are high chances” of a rate cut at the February 24 meeting, he said.
In order to keep interest rates steady on November 25, the central bank signaled higher inflation while military conflicts kept economic growth weak.
Israel has since reached a ceasefire with Hezbollah in Lebanon, while its war in Gaza following the October 7, 2023 attacks by the Palestinian Islamist group Hamas has become much less intense despite 100 hostages remaining held in Gaza.
The Houthis fire missiles almost daily from Yemen, but overall, Israel's risk premium – a key concern at the Bank of Israel – has improved significantly and has also risen against the dollar in the past few months.
Yoni Fanning, chief strategist at the Federal Reserve, said it may still be too early to cut interest rates Mizrahi-Tefahot (TASE:) The bank.
“The way it looks now is that postponing it for another month and a half seems like a better idea,” Fanning said. “The biggest risk for the central bank is losing control over prices.”
He pointed out that keeping interest rates high will not affect the supply side or the competitive level in the business sector, which is currently pushing prices higher. He added, “But it will work to tame consumer demand, and ultimately stabilize inflation.”
In addition to the interest rate decision, the central bank will also publish updated economic estimates for 2025, while Governor Amir Yaron will hold a press conference at 4.15pm on Monday.
The bank's economists currently estimate economic growth of 3.8% in 2025 and inflation of 2.8%, within the government's annual target of 1-3%.
