The Bank of Israel is at a crossroads in its upcoming interest-rate decision, as analysts are divided between advocating for a rate cut to stimulate the war-damaged economy and maintaining current policy to stabilise the shekel, Bloomberg reported on Monday. Nine out of 17 economists surveyed by Bloomberg anticipate the central bank holding its base rate at 4.5 per cent, while the remaining eight foresee a 25 basis points rate cut to 4.25 per cent. Tensions escalated last week following Iran's threat of retaliation against Israel, resulting in market fluctuations, with Israeli stocks declining and the shekel experiencing a significant drop. Despite this, the shekel rebounded partially due to Iran's decision not to retaliate over the weekend. The rising tensions have worsened Israel's inflation outlook, with break-even rates exceeding the central bank's target range. Rafael Gozlan, chief economist at IBI Investment House, suggests that heightened risks and inflation expectations may prompt a cautious approach from the Bank of Israel, potentially delaying rate cuts. Despite current low inflation levels, Gil Bufman of Bank Leumi argues for a rate cut, given that inflation remains within the target range. Concerns persist regarding the fiscal impact of the unlawful war on Gaza, as this year's budget forecasts a significant deficit. Amir Yaron, the Bank of Israel's governor, underscores the importance of fiscal policy in shaping monetary decisions. Victor Bahar of Bank Hapoalim advises against concluding solely from current inflation rates, highlighting the importance of future projections. Post-rate decision, the central bank is expected to release updated macroeconomic forecasts, with a focus on expansionary fiscal policy concerns. Jonathan Katz of Leader Capital Market anticipates revisions in inflation and interest-rate outlooks, reflecting prevailing economic conditions. The central bank faces the challenge of balancing inflation expectations with the ongoing economic recovery from the conflict. While some sectors witness rebounds, others, such as construction and tourism, continue to struggle, prompting considerations about appropriate interest-rate levels. Alex Zabezhinsky of Meitav DS Investments emphasises caution, suggesting that while maintaining high-interest rates may mitigate short-term market volatility, it could pose long-term risks to economic and market stability.
