Bank of Israel Governor Signals Uncertain Rate Cut, Shekel Stabilizes Near 2.99 Against Dollar

The Israeli shekel stabilized in the local foreign exchange market, trading around 2.99 against the US dollar following a sharp decline the previous day. The euro was slightly above 3.46 shekels. Globally, the dollar index fell 0.1% to 99.6 points, while the euro and pound remained steady at about 1.16 and above 1.35 dollars respectively.

Bank of Israel Governor Amir Yaron stated in a Bloomberg interview that the upcoming interest rate decision on September 1 will be made in 'real time' and a rate cut is not guaranteed. This follows the central bank's last meeting where it lowered the rate from 3.75% to 3.5%, marking the third reduction this year from 4%. Yaron emphasized that the decision will depend on evolving data, including labor market conditions, inflation, geopolitical risks, and fiscal challenges.

Although annual inflation dropped to 1.5% in July, which could justify a rate cut, Yaron expects inflation to rise back toward 2% in the coming months, aligning with the Bank of Israel's target midpoint. He also warned that the next government, formed after October elections, will face the difficult task of reducing the debt-to-GDP ratio while managing defense spending and investing in growth engines.

Ofer Klein, head of economics and research at Harel, predicts the bank will likely avoid cutting rates at the next meeting. He forecasts a sharp 0.9% rise in August's consumer price index due to higher travel and fuel costs, followed by a 0.2% decline in September. Klein expects inflation to remain around 1.9% over the next year and believes the rate will stay steady amid increased geopolitical and fiscal uncertainty, rising wages, and strong growth, though a rate cut may occur by year-end.