Bank of Israel Holds Interest Rate Steady at 3.25%
Translated & summarized from Ice by baba
The Bank of Israel, led by Governor Amir Yaron, maintained the interest rate at 3.25% on Wednesday, pausing a series of cuts. This decision, made shortly before elections, comes despite a 0.5% drop in the September Consumer Price Index. Factors like a temporary fuel tax cut and shekel depreciation pose risks to future inflation. The next rate decision is expected on November 23.
The story in 6 lines · by baba
- Bank of Israel Governor Amir Yaron kept the interest rate at 3.25%, halting previous cuts.
- The decision was made six days before the Knesset elections, despite low inflation data.
- The Prime Rate remains at 4.75%, offering no immediate relief for borrowers.
- September's 0.5% CPI drop was influenced by temporary factors like a fuel tax cut.
- Risks to inflation include the expiring fuel tax cut and a weakening shekel.
- The next interest rate decision is scheduled for November 23, after the elections.
The Bank of Israel, led by Governor Professor Amir Yaron, decided on Wednesday to keep the benchmark interest rate unchanged at 3.25%, aligning with market expectations. This decision halts a series of three consecutive rate cuts that occurred in May, July, and September. The Monetary Committee's choice comes just six days before the Knesset elections, despite recent low inflation data that could have allowed for further reduction.
The Prime Rate, a basis for many loans and mortgages, will remain at 4.75%. Consequently, borrowers using Prime Rate loan schemes will not see any additional relief in their monthly payments this month. The decision followed a 0.5% decrease in the September Consumer Price Index, a steeper drop than anticipated.
Despite the monthly decrease, the annual inflation rate slightly increased from 1.5% in August to 1.6% in September, still remaining below the Bank of Israel's target range of 1%-3%. Inflation expectations also show relative stability, with forward-looking data from the capital market suggesting 1.7% for the upcoming year and economists' average forecast at 2.1%.
However, the September price index drop is not a guarantee of continued inflation moderation. A significant portion of the decline was attributed to temporary factors, such as cheaper flights abroad and a reduction in fuel excise tax. This tax cut is set to expire at the end of October, potentially leading to renewed fuel price increases in November and contributing to a rise in the CPI. Further risks include the weakening of the shekel against the dollar, which recently hit a nine-month low, potentially increasing import costs and inflationary pressures. Global oil price volatility and geopolitical developments add to the uncertainty.
The timing of the decision, preceding the elections, also drew attention. A Reuters survey indicated that all 15 participating economists predicted no change in the interest rate. Barclays cited political uncertainty as a factor supporting a wait-and-see approach. Economic activity data does not indicate an urgent need for another rate cut, with the Israeli economy having grown at a 15.4% annual rate in the second quarter, and the labor market remaining relatively tight.
The next interest rate decision is scheduled for November 23, after the elections and the release of the October CPI data. If inflation remains low and the shekel stabilizes, the Bank of Israel may resume rate cuts as early as next month.
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