Bank of Israel seen pausing next week, unclear if rate hike cycle over: Reuters poll

By Steven Scheer

JERUSALEM (Reuters) – Israel’s central bank is expected to leave short-term interest rates unchanged next week after an aggressive tightening round aimed at battling persistent inflation, but analysts are split over whether the rate hike cycle has ended.

Of the 17 economists polled by Reuters, 13 projected the Bank of Israel would hold its benchmark rate at 4.75% – its highest level since late 2006 – when it announces its decision on Monday at 4 p.m. (1300 GMT).

Three others foresee a 25 basis point increase to 5.0%, while one expects a 15 basis point increase to 4.90%.

“It is a close call. I wouldn’t be surprised if they pause and hike in September,” said Rafi Gozlan, chief economist at IBI Investment House, who is one of the four expecting a rate hike.

Israel’s annual inflation rate eased to 4.6% in May from 5% in April, staying well above its 1-3% annual target.

When it began hiking rates in April 2022, the Bank of Israel had initially hoped its front-loading stance would be able to cap its key rate at around 3%. But inflation has remained sticky, partly due to a weaker shekel against the dollar, and it continued to tighten, reaching 10 straight times in May.

“The Bank of Israel understands that the interest rate is already high enough and now it is mainly required to leave it like this for a longer time,” said Amir Kahanovich, chief economist for the Excellence Investment House.

“The only question is how the weakening of the shekel will affect his decision,” he added, referring to Bank of Israel Governor Amir Yaron and a shekel that remains weak versus the dollar.

Still, a number of economists believe the cycle is over and rate cuts will begin early in 2024. Others expect a Federal Reserve-style pause and a resumption in policy tightening in September should the shekel weaken further and keep inflation high.

Morgan Stanley (NYSE:) economist Alina Slyusarchuk said she sees “inflation pressures persisting in the upcoming months … Growth has also been holding on and the tightness of the labour market persists” with the jobless rate low at 3.6%.

In addition to the rates decision, the Bank of Israel will publish its quarterly macroeconomic updates, while Yaron – who has been heavily criticised by some lawmakers for the surge in mortgage rates – is scheduled to hold a press conference on Monday at 4:15 pm (1315 GMT).

The central bank currently forecasts Israel’s economic growth will slow to 2.5% in 2023 from 6.5% last year.

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