As inflation continues its downward trajectory, the economic landscape in Israel is poised for significant shifts, with the prospect of further interest rate reductions becoming increasingly plausible. The Bank of Israel, which previously dialed back the interest rate by 0.25% to 4.5% in early January, is slated to unveil its forthcoming interest rate decision on Monday, February 26. This announcement comes amidst a recalibration of economic forecasts following the release of the latest inflation data, which underscores a deceleration in price hikes and positions inflation within the ideal range for price stability.
In the wake of the inflation report, which revealed a dip to an annual rate of 2.6%, the consensus among economists is veering towards the anticipation of an imminent rate cut. This adjustment in inflation not only indicates a stabilization of prices but also highlights the absence of significant price increases in key categories such as fruits and vegetables, where excluding these, the inflation rate further narrows to 2.2%. This data suggests that the Israeli economy is managing to contain inflationary pressures effectively, a sentiment echoed by Alex Zabezhinsky, Chief Economist at Meitav Dash, who observed a marked decline in inflation since the onset of the war.
ריבית | ביום ב', ה - 26.02 בשעה 16:00 החלטת ריבית של בנק ישראל. למחרת לא יתקיים מסחר, שכן יהיו בחירות לרשויות המקומיות.
— Ultras (@UltrasYoav) February 20, 2024
Compounding the argument for a rate reduction are the latest GDP figures, which expose a stark 20% contraction in the economy during the last quarter of 2023, on an annualized basis. This contraction signals the need for stimulative measures from the Bank of Israel to foster economic recovery. Consequently, both Meitav Dash and Goldman Sachs project that the Bank of Israel might lower interest rates to 4.25% in the upcoming announcement, a move aimed at revitalizing the economy.
The trajectory of the shekel also plays a critical role in these considerations. Despite experiencing a significant depreciation in the initial phases of the war, the shekel has demonstrated resilience, appreciating since November to trade at NIS 3.64/$, a figure that surpasses its pre-war valuation. This strengthening of the shekel, coupled with a reduced risk premium as evidenced by the CDS yield, suggests that the Bank of Israel's concerns over financial stability may be unfounded, further reinforcing the case for a rate cut.
Bank of Israel could hike rate again next week: With inflation falling, estimations have changed and more and more economists believe we will see a further interest rate cut this month. https://t.co/3jpMFZgkAC Globes pic.twitter.com/4O7yLK3XE4
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However, dissenting voices, such as Modi Shafrir, Chief Financial Markets Strategist at Bank Hapoalim, caution against precipitous actions. Shafrir underscores the strategic patience of the Bank of Israel, which anticipates a limited scope for rate cuts, targeting an interest rate corridor of 3.75%-4% for 2024. This conservative approach is buttressed by the central bank's emphasis on measured rate adjustments, particularly in the context of ongoing geopolitical tensions and the specter of escalation with Hezbollah.
The decision to adjust interest rates further is also informed by the global economic context, particularly the interest rate disparities with Western countries which could impact financial stability and the value of the shekel. Notably, the US Federal Reserve and European Central Bank's hesitance to reduce rates adds another layer of complexity to Israel's monetary policy deliberations.
As the Bank of Israel approaches its next interest rate decision, the interplay between domestic economic indicators, geopolitical considerations, and international monetary trends will be critical in shaping the country's economic trajectory. The decision will not only reflect the bank's assessment of the current economic landscape but also its strategic vision for Israel's financial stability and growth amidst global uncertainties.
