Achi news desk-
(Bloomberg) — The Bank of Israel is set for a close interest rate call on Monday, with analysts almost evenly split between those predicting a cut to boost the war-torn economy and those which sees financial authorities maintaining a consistent policy to protect the shekel.
A narrow majority of economists surveyed by Bloomberg – nine out of 17 – say the central bank will hold its base rate at 4.5% for a second meeting of the Monetary Policy Committee in a row. Citigroup Inc. and JPMorgan Chase & Co. among them.
The other eight, including Goldman Sachs Group Inc., see the MPC cut the rate by 25 basis points to 4.25%.
The consensus moved towards a standoff last week after Iran vowed to retaliate against Israel for a strike on Tehran’s consulate in Damascus. The attack killed at least 13 people, including two Iranian generals. Israel put its forces on high alert. Israeli stocks fell, while the shekel suffered its second worst week this year.
The currency rebounded 1.1% to 3.72 per dollar as of 9:40 am in Tel Aviv on Monday, partly because Iran did not retaliate over the weekend.
The rising tensions contributed to worsening Israel’s inflation outlook in recent days, as measured by cost recovery rates. Two-year cost recovery has risen to 3.17%, above the central bank’s target range of 1% to 3%.
“The increase in the risk premium of all Israeli assets together with higher inflation expectations, will likely put the Bank of Israel in a cautious position which will lead to the postponement of rate cuts,” said Rafael Gozlan, chief economist in Tel Aviv. IBI Investment House.
The central bank cut rates for the first time since the height of the covid pandemic in January, and at the end of February it left them unchanged due to concern that inflation could accelerate as the war against Hamas in Gaza continues and the government increase defense spending.
For now, inflation remains low. The rate fell year on year to 2.5% last month from 4.1% in August.
“Markets have reduced the probability of a cut to 30%, but we think the chances are higher because inflation is entrenched within its target range,” said Gil Bufman, chief economist at Bank Leumi, Israel’s biggest lender according to market valuation. “This could allow the bank to maintain a real interest rate of more than 1% even with a small cut,” he said, referring to inflation-adjusted rates.
One concern for markets is the financial impact of the war. This year’s budget predicts a deficit of 6.6% of gross domestic product, a deficit that would be among the largest for Israel this century. It may be even wider if the conflict in Gaza is protracted or if tensions with Iran and Lebanon’s Hezbollah — the main proxy militia of the Islamic Republic — worsen.
Amir Yaron, the governor of the Bank of Israel, has repeatedly said that he is concerned about fiscal policy and that it will be an important factor in determining monetary policy.
Israel’s current inflation rate “can be misleading” and “doesn’t necessarily indicate what’s in store for the future,” said Victor Bahar, chief economist at Bank Hapoalim, Israel’s second-largest lender.
The central bank is due to release a new macroeconomic outlook after the rate decision. Jonathan Katz, strategist at Leader Capital Market, says the bank will likely “underline its concern about more expansionary fiscal policy.”
Katz expects the central bank’s inflation forecast for this year to rise towards 3%, up from 2.4% in January. It also sees the interest rate forecast climbing to 4%-4.25% from 3.75%-4%.
The central bank will need to weigh rising inflation expectations against an uneven economic recovery from the first weeks of the war. Many industries, including construction and tourism, are still suffering, even as credit card spending rebounds.
“The economy is far from returning to its full growth potential,” said Alex Zabezhinsky, chief economist at Meitav DS Investments. “Keeping interest rates high may reduce market volatility in the short term, but increase the risk to the economy and market stability going forward.”
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