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Forced Operation Al-Aqsa FloodAnd the war on Gaza And the subsequent economic repercussions, Bank Israel The Central Bank decided to reduce interest rates by 0.25% to 4.5%, which is the first reduction since March 2020 with the beginning of the “Covid 19” pandemic.
The cut comes Benefit After 10 increases between April 2022 and May 2023, a period that saw interest rates rise from a historic low of 0.1% to 4.75%, as the Bank of Israel sought to curb rising inflation.
This decision came after the release of data showing the weakness of the Israeli economy and the decline in inflation as a result of the war on Gaza since the seventh of last October.
It is noteworthy that lowering interest rates allows more money to be borrowed from banks, at a lower cost, to finance projects, increase spending, and thus increase economic activity.
Inflation
Inflation in Israel peaked at 5.3% in January, but fell to 3.3% in November and is expected to decline to 3% next month, which is the upper end of the central bank’s annual target range (between 1% and 3%). .
The bank expects inflation to decline to 2.4% by the last quarter of 2024, and to 2% by the corresponding quarter of 2025, according to the Israeli economic newspaper Globes.
Central Bank Governor Amir Yaron expected more interest cuts with the aim of economic revitalization, after pressures resulting from the war launched by Israel in the Gaza Strip.
Yaron said, “The expectations of the Research Department (at the Bank of Israel) estimate that interest rates will reach a range of 3.75%-4%, on average, in the last quarter of 2024.”
The Central Bank said, “The war has major economic repercussions, whether on real economic activity or on financial markets… There is a great deal of uncertainty regarding the severity and duration of the expected war, which in turn affects the extent of its impact on activity.”
Uncertainty
The Bank of Israel left its 2024 growth forecast unchanged at 2% for both 2023 and 2024, while it expects 5% growth next year, but noted that the forecast is characterized by a particularly high level of uncertainty, including regarding the decisions to be made. The government's decision on how the budget deals with defense and civilian needs arising from war.
The Central Bank expects the fiscal deficit to expand to 4% by the end of 2023, an increase of 0.3% from its previous forecast, and to 5.7% in 2024, an increase from 5% in its previous forecast.
The bank’s Monetary Committee, which took the interest decision, said, “In light of the war, the Monetary Committee’s policy focuses on stabilizing markets and reducing uncertainty, in addition to stabilizing prices and supporting economic activity. The interest path will be determined according to the continued approaching… Inflation Who is it targeted for, the stability of financial markets, economic activity, and fiscal policy?
