By Steven Scheer

JERUSALEM (Reuters)

The Bank of Israel kept interest rates unchanged on Wednesday, marking the fifth consecutive meeting without a rate change. The decision was driven by geopolitical uncertainty, rising inflation, and economic risks, with rates expected to remain steady until 2025.

The central bank is concerned about Israel’s increased risk premium since the onset of the war against Hamas on October 7, maintaining its benchmark rate at 4.50%. All 15 analysts surveyed by Reuters had predicted no alteration in rates.

In a statement, the Bank of Israel emphasized that the monetary committee’s focus is on stabilizing markets, reducing uncertainty, maintaining price stability, and supporting economic activity amid the ongoing conflict.

Policymakers voiced apprehension regarding potential loosening of fiscal policy due to the war, which is reflected in high yield spreads between Israeli government and U.S. bonds, and record levels in credit default swap spreads.

Earlier this year, the central bank had cut interest rates by 25 basis points in January due to easing inflation and slowing economic growth during the Gaza war, but has since held steady in February, April, May, and July.

Some analysts suggested there might be further rate cuts this year, with two meetings scheduled for October 9 and November 25. However, Deputy Governor Andrew Abir stated that further cuts are unlikely, indicating that any changes remain data-dependent.

Abir noted, “It’s unlikely for us to be cutting rates until well into 2025,” emphasizing the uncertainty surrounding the war and existing economic disruptions.

With rising inflation and the impact of the war leading to supply issues and labor shortages, the government faces a higher budget deficit and has yet to provide a credible state budget for 2025.

Abir remarked, “Because of the fiscal situation, that leads us to be more cautious and conservative about monetary policy. We think a higher level of interest is needed to keep the economy and markets stable.”

In July, Israel’s annual inflation rate rose to 3.2% from 2.9% the previous month, surpassing the government’s target range of 1%-3%, after hitting as low as 2.5% in February.

The economy recorded an annualized growth rate of 1.2% in the second quarter, significantly slowing from a 17.3% growth in the first quarter.

The Bank of Israel concluded that current economic activity is below the trend line and lower than the previous year, mainly due to supply limitations.