Israel Monetary Policy October 2023

Israel: Central Bank stays put in October

At its 23 October 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 Bank also commented that it had activated a program to sell foreign exchange and to provide liquidity in financial markets in the wake of the conflict with Hamas.

The decision to keep rates unchanged was driven by declines in headline and core inflation in recent months, and by one-year inflation forecasts that were within the Central Bank’s target range of 1.0–3.0%. Together with the weaker economic outlook due to the war with Hamas, this meant that further rate hikes were not warranted. Conversely, the Bank likely judged that any rate cuts were premature, given headline and core inflation were still above target, the shekel had depreciated to a multi-year low in recent weeks, and that the duration and economic impact of the conflict were still unclear.

Looking forward, the BOI removed the previous meeting’s guidance about possible future rate hikes, and stated that monetary policy would be guided by a desire to stabilize the markets and reduce uncertainty. For now, our Consensus is for rates to stay broadly unchanged this year before dipping in 2024, though an intensification of the conflict could spur rate cuts.

Giving their take on the monetary policy outlook, analysts at Goldman Sachs said: “While we think Israel’s financial stability risks and economic vulnerabilities are lower than during previous episodes of escalating tensions and conflict — owing to Israel’s stronger balance of payment position, large stock of FX reserves and likely significant overseas inflows — we nevertheless think the Bank of Israel will maintain a cautious policy stance. Instead, we think more meaningful economic support is likely to be provided by fiscal policy at this stage, whereas monetary policy easing would require the BoI to be confident that exchange rate developments have stabilized.”

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