Israel Set to Hold Rates as Inflation Spikes, Gaza War Escalates
(Bloomberg) --
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Israel's central bank is set to keep interest rates on hold for the 11th time in a row, amid increased military operations in Gaza and an uptick in inflation.
The Bank of Israel will maintain its base rate at 4.5% on Monday, according to all analysts polled in a Bloomberg survey.
The announcement will come against the backdrop of an acceleration in annual inflation. The rate rose to 3.6% last month from 3.3% in March. The April reading was the highest in eight months — barring January, when there was an hike in VAT — and pushes the figure further above the central bank's target inflation range of between 1% and 3%.
Economic growth in the first quarter was slightly higher than expected at 3.4%, moderating the need for an imminent rate cut. Still, the pickup from the fourth quarter of 2024 was mostly attributable to a two-month ceasefire between Israel and Hamas over much of the measured period. That has since collapsed and Israel now says it stepping up attacks on Hamas to force the militant group to surrender and release hostages.
Governor Amir Yaron previously signaled the central bank could start cutting rates in the second half of this year, provided inflation decelerated and market-risk premiums remained under control. Israel's five-year credit default swap spreads, a measure of bond traders' confidence in the country's debt, have fallen from 121 basis points to 103 basis points since April. But they remain well above the levels from before Hamas's Oct. 7, 2023 attack on Israel, which triggered the war in Gaza.
'The Bank of Israel will find it difficult to reduce the interest rate as long as inflation exceeds the target,' Bank Hapoalim's Financial Division said in a note to clients last week. 'It's reasonable to assume we'll be seeing a first cut only toward the end of the summer.'
Hapoalim, Israel's second largest lender, recently raised its inflation forecast for 2025 to 3.2% from 3%.
Rafael Gozlan, chief economist at IBI Investment House Ltd. in Tel Aviv, sees monetary policy remaining tight. 'Recent developments have significantly increased the probability of rate stability through the end of the year,' he said.
On Sunday, Israeli media cited a military briefing in which officials said they would push to take over 75% of Gaza within two months, up from around 40% now.
There are tens of thousands of reserve soldiers involved in Gaza operations, which is likely to impact an Israeli economy already grappling with labor and supply shortages.
In addition, multiple airlines have stopped flying to Israel following an increase in missile attacks by the Yemen-based Houthis.
Airfares were the main driver of last month's increase in the inflation rate. Costs are expected to remain high throughout the summer holiday season, though price levels overall were slightly moderated by a stronger shekel, helped by the dollar's weakness.
Domestic tensions are also set to be a factor for the central bank.
Prime Minister Benjamin Netanyahu appointed a new head of Shin Bet, Israel's domestic intelligence service, over the weekend, ignoring his attorney general's legal guidance. It's the latest example of the showdown between the prime minister and the country's institutions.
'There is positive correlation between the strength and independence of the institutions and economic growth,' Yaron said at a press conference earlier this year. 'If markets interpret that there is damage to that strength it will reflect in damage to the economy.'
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