Bank of Israel Cuts Interest Rate for Third Time, Further Reductions Possible

The Bank of Israel's Monetary Committee lowered its benchmark interest rate by 0.25 percentage points to 3.25%, marking the third consecutive reduction. This decision, while anticipated by some, was not fully priced into the market, with economists divided and only a 40% probability of a cut priced in beforehand. The central bank cited moderating inflation, now below its target range, and a weaker-than-expected economic picture as key reasons for the move. Despite a strong headline GDP growth figure of 6.2% in the second quarter, growth excluding the output of Israeli companies abroad, notably influenced by firms like Nvidia, stood at a more modest 3.8%.

Analysis from Leader Capital Markets suggests that current economic data supports the rate cut and may even pave the way for further reductions. Their weekly macro review highlights a broad slowdown in price increases, including rent and services, alongside moderating consumer spending. Credit card purchases in July saw a real-term decrease of about 1% after a similar drop in June, indicating consumers are spending less. While increased travel abroad might contribute, the cooling domestic demand reduces inflationary pressure, giving the Bank of Israel more room to maneuver.

Signs of moderation are also appearing in the labor market. While nominal wage growth remains around 5.6% over three months, with higher increases in industry and construction, other sectors like retail and food services show slower wage growth. The increase in foreign workers and a potential rise in job seekers following the release of reservists are contributing to a less tight labor market than before. The strengthening shekel also aids the central bank by reducing import costs and acting as an anti-inflationary anchor, even as it poses challenges for some exporters.

Leader Capital Markets believes these trends could lead to another rate cut as early as November, provided inflation remains stable or continues to fall and the shekel strengthens. However, they caution that geopolitical developments or increased government spending could reignite inflationary pressures. While global central banks, including the US Federal Reserve, are adopting a more hawkish stance, the Bank of Israel's policy is not necessarily tied to theirs, as demonstrated by its previous rate cut despite hawkish signals from the US.