Israel Monetary Policy November 2023

Israel: Central Bank stays put in November

At its 27 November meeting, the Bank of Israel (BOI) kept the policy rate at 4.75%, following 465 basis points of tightening from early 2022 through to May this year.

The decision to not hike further was driven by notable declines in headline and core inflation in recent months, market inflation expectations within the Central Bank’s target range of 1.0–3.0%, and the weaker economic outlook due to the war with Hamas. Conversely, the Bank likely judged that any rate cuts were premature, given headline and core inflation were still above target, the shekel has been highly volatile in recent weeks, and that the duration and economic impact of the conflict were still unclear.

Looking forward, the BOI’s guidance grew more dovish, in light of the shekel becoming stronger than its pre-war level in late-November after briefly crashing to the weakest level in years in the wake of the war. The Bank stated that, if financial markets remained stable and inflation continued to moderate, “monetary policy will be able to focus more on supporting economic activity.” Several panelists see rate cuts ensuing in Q1 2024, and all panelists forecast rate cuts by Q2. Our Consensus is for rates to end 2024 around 100 basis points below their current level.

Giving their take on the monetary policy outlook, analysts at Goldman Sachs said:

“We think that fiscal policy is likely better suited to address the negative economic consequences of the shock to the economy, and with large fiscal spending projected for next year and still high uncertainty, we think that the initial rate cuts are likely to be gradual. Instead, we think that room for more substantial rate cuts would largely come in the event that the Shekel appreciation continues more forcefully. Taken together, our current base case is that the Bank of Israel will begin to cut interest rates in Q2 of next year.”

In contrast, Bank Leumi’s Gil M. Bufman is more dovish:

“We expect that the first step of interest reductions could start as early as the upcoming monetary policy meeting announcement of January 1st, 2024 with a 25 basis-point rate cut to 4.50%.”

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