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(Bloomberg) -- Israel will likely hold interest rates for a ninth consecutive time, as the central bank monitors for signs that war-induced inflation will soon slow.
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The Bank of Israel is expected to keep its base rate at 4.5% on Monday, according to nine analysts in a Bloomberg survey.
Israel’s economy is starting to recover from the strain of conflicts with Iranian-backed militant groups, after ceasefires in Gaza and in Lebanon. Yet, annual inflation is running at 3.8%, above the country’s official target of 1% to 3%.
Bringing the rate down is seen as one of the last major obstacles to monetary easing, with Israel assets, including the shekel and the country’s credit-default swaps, having largely stabilized on the back of the truces from late last year. The Israeli shekel is up 1.8% against the dollar this year, roughly in line with other so-called expanded-major currencies tracked by Bloomberg.
Citigroup Inc. sees the central bank and Governor Amir Yaron cutting rates by May, provided inflation decelerates and risk premiums related to Israel’s multi-front conflict remain under control.
Monthly inflation in January came in at 0.6%, reflecting a hike in value-added tax to fund Israel’s higher defense needs and in electricity and water costs.
“In contrast to the situation in the US, inflation expectations in Israel are low, and the fiscal situation also looks better,” Bank Hapoalim, one of Israel’s two largest lenders, said in a note to clients last week.
Lower borrowing costs would help boost the $550 billion economy. Gross domestic product rose 1% last year, the least in over two decades, barring the Covid-19 pandemic. That was mainly due to a slump in investments, exports and private consumption, which offset an increase in defense-related expenditure.
For all that the ceasefires have bolstered Israel’s economic outlook, there’s no guarantee they will last. The first stage of a truce with Hamas ends this weekend. The US is keen for an extension but it’s unclear if the warring sides will agree to one.
Another potential source of market volatility is the 2025 budget. It’s meant to be passed by the end of March but there’s the potential for some of Prime Minister Benjamin Netanyahu’s coalition members to block it over domestic political disputes, including over the war strategy.