The BOI prefers to be cautious, but signals further loosening ahead

ISRAEL - In Brief 26 Feb 2024 by Jonathan Katz

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The Bank of Israel decided to err on the side of caution today and kept rates stable at 4.5%. Some of the same phrases in the announcement were similar to those in the previous rate decision (when rates were cut by 0.25%): “There is a great amount of uncertainty with regard to the expected severity and duration of the war. The war is having significant economic consequences, both on real economic activity and on the financial markets, and the country’s risk premium remains high”. In addition, despite the fact that inflation “has moderated and is within target”, “The Committee’s assessment is that there are still a number of risks of a potential acceleration in inflation: the effects of the war and its progress on economic activity, the constraints on activity in the construction industry, a depreciation of the shekel, and fiscal behavior.” This statement is similar to the previous decision, although “constraints in the construction industry" was added. Inflation expectations are within target, but one-year expectations moved higher (there was no mention that this is due to the planned 1% VAT increase in January 25). The shekel has appreciated and there is a gradual recovery in the labor market and in activity. In the press conference, the Governor stressed the concern regarding fiscal uncertainty (he elaborated on this) and inflationary risks from both the supply and demand side going forward. Rental prices could reaccelerate with supply expected to diminish due to lack of workers. He also hinted the global inflationary outlook (and central banks postponing loosening), which looks more persistent, could have an indirect impact on Israel. Basically, he still sees the in...