Bank of Israel Expected to Cut Interest Rate but Maintains Cautious Outlook

The Bank of Israel's Monetary Committee is widely expected to reduce the interest rate by 0.25% in its decision on Monday. However, the main focus is on the economic forecast the central bank will release alongside the rate decision. Economists anticipate that despite the rate cut, the Bank of Israel will emphasize ongoing risks such as a tight labor market, rapid wage growth, elevated geopolitical risks, and rising prices, particularly in the rental sector.

The inflation environment has improved, with inflation hovering around the bank's 2% target, and the strong shekel continues to ease inflationary pressures. Jonathan Katz, Chief Economist at Leader Capital Markets, highlighted the importance of the forecast for the second quarter of next year, noting that a forecast range of 3% to 3.25% could be seen as relatively dovish, while a 3.25% forecast would signal a more hawkish stance. Katz pointed to the rapid wage growth in the business sector as a key factor supporting monetary caution.

Mudi Shapira, Chief Market Strategist at Bank Hapoalim, added that rising rental prices, accelerating average wage growth, and the more hawkish approach of global central banks, especially the US Federal Reserve, argue against a larger rate cut than 0.25%. The Bank of Israel is expected to balance these factors carefully in its upcoming decision and forecast.

Separately, a confidential summary revealed that the debate over Israel's defense budget has been postponed to the next government, indicating ongoing fiscal uncertainties. The Bank of Israel's cautious stance reflects these complex economic and geopolitical challenges.