The Bank of Israel held interest rates steady on Monday for the second straight meeting after cutting them in January, but its governor said further rate cuts were possible this year as long as regional tensions ease.
Follow Israel Hayom on Facebook, Twitter, and Instagram
Saying financial markets have been volatile of late, and citing concerns over a re-acceleration of inflation, looser fiscal policy, and a recovering economy, the central bank kept its benchmark rate at 4.5%.
"In view of the war, the monetary (policy) committee's policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity," the central bank said in a statement referring to the war against the Hamas terror organization since Oct. 7.
At a post-decision news conference, governor Amir Yaron was largely hawkish, saying future rate cuts would come only when geopolitical concerns after six months of war and inflation pressures ease.
Although inflation has come down to a rate of 2.5% in February and is now within its 1-3% annual target, Yaron said there were risks to a possible re-acceleration including, the developments of the war, a weaker shekel, global oil prices and an expansion in state spending.
"As long as we see the geopolitical environment moderate and stabilize ... we can return to our (easing) path," Yaron said, pointing to a rates level of as low as 3.75% this year, which is the estimate of the central bank's economists.
The Finance Ministry earlier said the budget deficit reached 6.2% in March over the prior 12 months, largely on wartime spending. Lawmakers had passed an amended 2024 budget that added tens of billions of shekels in spending to fund the war, raising the deficit target to 6.6% of gross domestic product from 2.25%.
Yaron said higher tax income would likely allow the target to be met.
In updated forecasts, the central bank's own economists project Israeli economic growth of 2% this year – assuming the war is contained to Gaza and winds down in 2024 – and 5% in 2025.
"The Israeli economy has strong economic foundations that can support a continued process of recovery," Yaron said.
Inflation in a year's time would rise to a 2.8% rate but dip to 2.3% in 2025, near the middle of its 1%-3% target range.
Analysts polled by Reuters were narrowly split ahead of the decision, with seven expecting a 25 basis-point rate cut and five projecting no move.
Prior to January's cut, it had been on hold since last July following an aggressive tightening cycle in which it raised rates 10 straight times from an all-time low of 0.1% in April 2022.
The shekel was 2% stronger versus the dollar at a rate of 3.68 after the rate decision. Yaron declined to discuss whether the bank would go back to intervening in the forex market.
