Bank of Israel Expected to Hold Interest Rate Amid Inflation Drop, Citi Forecasts
The Bank of Israel will announce its interest rate decision next week, unusually on Tuesday instead of Monday. Market participants are closely watching the Monetary Committee, led by Governor Professor Amir Yaron, to see if a third consecutive rate cut will occur. Recently, futures contracts priced about a 50% chance of another cut, but expectations have cooled to around 40% due to the strengthening of the US dollar, which surpassed 3 shekels. This local currency trend contrasts with the global weakening of the dollar amid bond market strains and a 30-year bond yield hitting a two-decade high.
Senior officials in the Finance Ministry oppose increasing taxation on high-tech workers at this time. Meanwhile, former Prime Minister Naftali Bennett promised to dismantle monopolies but acknowledged the complexity involved, referencing the global investment giant Citigroup. Citi economists predict the Bank of Israel will likely keep rates steady despite July inflation falling to a five-year low of 1.5%. They argue that while a rate cut is possible, the absence of urgency makes holding rates more probable. Citi expects two more cuts later this cycle, bringing rates down to about 3%.
Citi highlights balanced arguments for either cutting or maintaining rates. Inflation remains below the central bank’s target range of 1%-3%, and the current rate is still restrictive. Risks to inflation, such as a tight labor market, fiscal spending, and global energy prices, existed since May and do not necessarily require easing now. The shekel remains strong, and cumulative exchange rate effects are somewhat disinflationary. The key reason for waiting is the lack of pressing need to act, with inflation forecasts expected to stabilize near the target by September.
Local economists are divided. Ofer Klein of Harel Insurance and Finance aligns with Citi, expecting no change due to a tight labor market, global headwinds, and geopolitical and budgetary risks. Conversely, Meitav Investment House strongly supports an immediate rate cut, citing subdued inflation and a strong shekel. They argue that the significant negative Taylor rule gap and currency strength justify stimulating economic activity and confidently predict a rate reduction in the upcoming decision.
Overall, the baseline scenario anticipates one 25 basis point cut later this year and another in early 2027, lowering the rate to around 3%. The Bank of Israel’s decision will be closely watched amid mixed signals from inflation data, currency movements, and economic risks.
