Bank of Israel cuts interest rate by 25 basis points to 4.50%

The Bank of Israel’s Monetary Committee reduced its benchmark interest rate by 25 basis points to 4.50% on 1 January 2024, its first cut since April 2020, as it weighed moderating inflation against the economic consequences of the war that began on 7 October 2023.

The rate had stood at 4.75% since May 2023, the peak of a tightening cycle that began in April 2022. In its announcement, the Committee said that in view of the war its policy was focused on stabilising markets and reducing uncertainty, alongside price stability and supporting economic activity. It said the war was having significant consequences for both real economic activity and financial markets.

INFLATION MODERATES TOWARDS TARGET

The Committee noted that the pace of inflation continued to decline. The consumer price index fell by 0.3% in November, and annual inflation eased to 3.3%, still above the 1% to 3% target range. Inflation expectations from various sources indicated that inflation would enter the target range in the first quarter of 2024.

Labour market conditions improved, with the broad unemployment rate falling to 8.5% in November from 9.7% in October. The shekel appreciated by 2.7% against the dollar and by 2% in nominal effective terms since the previous rate decision, while home prices declined by 1.3% over the preceding 12 months.

STAFF FORECAST

The Bank’s Research Department forecast published the same day projected GDP growth of 2% in both 2023 and 2024 and 5% in 2025, with inflation of 2.4% in 2024. It projected the interest rate at 3.75% to 4.00% in the fourth quarter of 2024, and assumed the war’s direct impact on the economy peaked in the fourth quarter of 2023.

The Committee said the future interest rate path would depend on the continued convergence of inflation to its target, continued stability in financial markets, economic activity and fiscal policy. The next rate decision was scheduled for 26 February 2024.