The Bank of Israel kept short-term borrowing rates unchanged for a third straight decision as expected on Monday, as policymakers worried about reigniting inflation despite a weakening economy as a result of Israel’s war against Hamas.
The central bank held its benchmark rate at 4.75% – its highest level since late 2006. It had raised rates 10 straight times in an aggressive tightening cycle that has taken the rate from 0.1% last April before pausing in July and again in August.
The inflation rate eased to 3.8% in September from 4.1% in August to remain above an annual target range of 1-3%.
Officials have cautioned that steep rate cuts at the moment would further weaken the shekel that is already at an 8-and-a-half-year low versus the dollar and push up inflation.
In order to stabilise the shakel, the Bank of Israel announced a programme to sell up to $30 billion (€28.24 billion) in foreign exchange, and a programme to make swap transactions up to $15 billion in the foreign exchange market.
The bank acknowledges that the war is having various economic effects, both on real activity and on the financial markets. Still, they say that the latter is functioning and a large part of economic activity is also continuing as usual.
The Bank of Israel has revised its macroeconomic forecast, projecting a GDP growth by 2.3% in 2023 and 2.8% in 2024, down from 3% in both years, assuming the conflict will be contained at the southern border of the country.
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