Rates on hold, fiscal deficit pushes higher despite strong revenues

ISRAEL - In Brief 08 Apr 2024 by Jonathan Katz

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The Bank of Israel maintained present policy rates on hold at 4.5% on April 8 (market expectations were divided). In the press conference the Governor was clear that elevated geopolitical risks and FX stability were key to the decision: “In view of recent developments, which indicate a substantial increase in the geopolitical uncertainty, the Monetary Committee decided to side with caution and kept the interest rate unchanged. This is consistent with the policy we have been taking since the eruption of the war, in which the Committee has focused on stabilizing the markets and reducing the uncertainty (our bold), alongside price stability and support for economic activity”. The BoI noted that inflation has continued to moderate in recent months, although inflation expectations have increased towards the high end of the inflation target (3%), in part due to expected tax hikes. Growth and the labor market are recovering and private consumption is strong. The inflationary risks, according to the MPC are many: “The Committee assesses that at this time there are several main risks for a possible acceleration of inflation: the development of the war and its impact on economic activity, depreciation of the shekel, the limitations on activity in the construction industry, fiscal developments, and global oil prices”. The BoI Research Dept macro forecast: There was no change in the GDP growth forecast: 2% in 2024 and 5% in 2025. The fiscal deficit is expected to reach target - 6.6% this year ( up from the 5.7% in Jan) and 4.6% in 2025 (up from 3.8%). Inflation will reach 2.7% this year (up from 2.4%), 2.8% one year from now, and 2.3% in 2025 (up from 2.0%). Broad unemployment to ...