As expected, the Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has left the interest rate unchanged at 4.75% as part of its focus on keeping the shekel as strong as possible. Some economists had hoped for a cut to boost economic activity during the war but the central bank, which has already announced a plan for selling up to $30 billion of its foreign currency reserves, has opted for keeping the Israeli currency as stable as possible.
Meanwhile, the Bank of Israel Research Department has revised its macroeconomic forecast in accordance with initial information gathered since the start of the war. The forecast is accompanied by particularly high uncertainty. Under the assumption that the war will be concentrated on the southern front during the fourth quarter of the year, GDP is expected to grow by 2.3% in 2023 and by 2.8% in 2024. It is expected that the impact to economic activity will lead to an increase in the government’s budget deficit, which will reach 2.3% of GDP in 2023 and 3.5% of GDP in 2024. In view of this, the debt-to-GDP ratio at the end of 2024 is expected to be 65%.
The Bank of Israel said, "The war is having various economic effects, both on real activity and on the financial markets. The Bank of Israel has taken a number of policy measures to deal with the situation. The financial markets are functioning, and a large part of economic activity is continuing as usual."
The Bank of Israel added, "The Israeli economy is strong, stable, and based on solid foundations. In the past, it has demonstrated its ability to recover from difficult periods. Prior to the war, the Israeli economy had a current account surplus, a low debt-to-GDP ratio, and high foreign exchange reserves. Economic activity in Israel was at a high level, despite some moderation in growth that was recorded in recent months. The labor market is tight and in a full employment environment.
"Inflation is moderating, and was 3.8% over the past year. Inflation remains above the target range, and is affected by developments with regard to the exchange rate. One-year inflation expectations and forecasts are within the target range, near the upper bound. Expectations derived from the capital market for the second year onward are within the target range.
"Since the outbreak of the war, there has been a further significant depreciation of the shekel, in addition to the depreciation since the beginning of the year. In view of the war’s impact and in order to stabilize the markets, the Bank of Israel announced a program to sell up to US$30 billion in foreign exchange, and a program to make swap transactions up to $15 billion in the foreign exchange market. Since the previous interest rate decision, the shekel has weakened by 6.3% against the US dollar, by 4% against the euro, and by 4.8% in terms of the nominal effective exchange rate," Globes reports.
