(Bloomberg) -- Israel’s central bank left interest rates unchanged for an eighth consecutive meeting as it anticipates more inflationary pressure stemming from the country’s multi-front war against Iran-backed militias.
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The Bank of Israel kept its base rate at 4.5% on Monday, in line with the estimates of all but one of 14 analysts in a Bloomberg survey. The outlier predicted a cut of 25 basis points.
The central bank said it sees interest rates at 4%-4.25% in the next 12 months. It revised up its 2025 economic-growth estimate to 4% from 3.8%, and for last year to 0.6% from 0.5%.
With military call ups causing labor shortages and many airlines no longer flying to Israel, inflation has accelerated to 3.4%, above the government’s target of 1% to 3%.
“To lower rates now would be similar to trying to take out a fire using fuel,” Amir Yaron, the central bank governor, said to reporters after the decision. “Because labor shortages are a major obstacle, lowering rates will increase demand without increasing supply, so it will just bring on price rises.”
The bank’s Monetary Committee said it was, in light of the continuing war, focusing on “stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity.”
It reiterated its intention to get the inflation rate back down to the target. Yaron has previously said monetary easing is probably off the table until the second half of 2025.
Israel’s economy has been hit since the conflict began with Hamas’ attack in October 2023 and gross domestic product grew slowly relative to most other developed nations last year.
But the central bank’s refrained from more cuts following its last one at the beginning of 2024, citing concern over market stability and increased government spending to fund the war effort.
Inflation may accelerate before falling back to target range. That’s mainly due to a 1% rise in value-added tax on Jan. 1, part of a 40-billion-shekel ($11 billion) fiscal plan aimed at lowering the budget deficit this year to about 4.5% of GDP from almost 8% in 2024. Water and power prices, as well as property taxes, have also increased, adding to immediate inflationary pressures.
Talk of a potential rate hike has died down in the past two months, largely because of the government’s fiscal tightening and the shekel appreciating since November, around the time as a truce with Hezbollah in Lebanon began.