Rates on hold, with a fairly hawkish tone

ISRAEL - In Brief 23 Oct 2023 by Jonathan Katz
As expected, rates remained on hold today at a level of 4.75%. In the press conference the Governor stressed that as long as Israel's risk premium remains elevated and shekel depreciation pressures continue, monetary loosening is off the table, despite decelerating domestic demand. The Governor also does not think that lowering the interest rate will be effective in encouraging activity at present, and emphasized the importance of fiscal tools. The message is very clear: no interest rate cut is expected as long as the volatility in FX continues with an increase in Israel’s risk premium. He sees the assistance programs (postponing interest rate payments, etc) for mobilized soldiers and residents around Gaza as equivalent to lowering the interest rate. He noted that an interest rate cut is possible after the conflict ends and Israel’s risk premium declines. The Research Department's interest rate forecast does predict an interest rate of 4.0% to 4.25% in Q3 of 2024. In summary, this is a relatively "hawkish" message from Governor Yaron. In contrast to previous crises (the Great Financial Crisis, Covid), this is a domestic crisis (with an increase in Israel’s risk premium) and not a global one, and therefore no interest rate reduction is expected as long as hostilities continue. The Bank of Israel macro forecast was relatively optimistic: GDP growth expected to reach 2.3% this year (previously 3%) and 2.8% next (previously 3.0%), with the fiscal deficit reaching only 3.5% next year and the debt/GDP rising to 65% (from 60% in 2022). Inflation will reach 2.5% in 2024 (2.9% NTM from Q323).

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