Israel central bank holds rate again as military conflicts boost inflation

The Bank of Israel kept interest rates unchanged on Wednesday for the sixth straight meeting, staying cautious as Israel’s year-long war with Hamas in Gaza and fighting with Hezbollah in Lebanon accelerates inflation and weakens economic activity.

The central bank – also worried about Israel’s investor risk premium which has risen since the war began on Oct. 7, 2023 – left its benchmark rate at 4.50 percent.

“In view of the continuing war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity,” the central bank said in a statement.

The decision to hold rates steady came despite the bank’s research department slashing its forecast for Israeli economic growth this year to 0.5 percent from a previous estimate of 1.5 percent.

The economy grew an annualized 0.7 percent in the second quarter, slowing markedly from a 17.2 percent pace in the first quarter.

The central bank had reduced rates by 25 basis points in January after inflation eased and economic growth slowed amid the Gaza war, but kept policy steady in February, April, May, July and August.

All 14 analysts polled by Reuters had expected no rates move on Wednesday.

Israel’s annual inflation rate rose to 3.6 percent in August from 3.2 percent in the previous month, moving further above the government’s 1 percent -3 percent target range after falling as low as 2.5 percent in February.

The central bank’s researchers raised their inflation forecast for the coming year to 3.2 percent.

“We have seen an increase in the inflation environment in view of the supply limitations in the economy,” the bank said.

“The increase in the pace of inflation is broad, and is reflected in both the nontradable and tradable components,” it added.