Israel Central Bank Keeps Interest Rates Steady as Gaza Conflict Continues, No Cuts Expected This Year

Israel’s central bank has decided to keep its main interest rate at 4.5%, with no plans to lower it for the rest of the year due to the ongoing conflict in Gaza. The bank’s deputy governor, Andrew Abir, explained that the extended fighting, which began in October, has pushed up government spending and driven inflation higher while also slowing down the economy.

Abir mentioned that it is unlikely that conditions will improve enough for a rate cut before the end of the year. He emphasized that the longer-than-expected duration of the conflict has hurt economic growth and increased inflation, which is now above the bank’s target range of 1% to 3%. Current inflation stands at 3.2%, and it could rise to 3.5% by January, according to market analysts. The bank does not expect inflation to return to target levels until the end of next year.

Inflation Concerns and Economic Pressures

The conflict in Gaza has created significant financial challenges, with the government spending heavily on defense and emergency measures. The Bank of Israel noted that this instability is reflected in the higher interest rates on Israeli government bonds, which are now at an 11-year high compared to U.S. bonds.

Governor Amir Yaron has called for deep budget cuts, proposing a reduction of about 30 billion shekels (around $8 billion), to help manage rising defense costs and debt levels. Israel’s debt is expected to reach 67.5% of GDP this year, up from 59% in 2022. Without proper budget controls, there is a risk that inflation could remain high, which would harm the country’s financial health.

Delay in Budget Decisions Adds to Worries

Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich have delayed talks on the 2025 budget, which is expected to be one of the most difficult in years. Usually, budget planning would have already started by now, but the ongoing conflict has caused delays.

The central bank is worried that without quick action to manage the country’s finances, Israel could face higher borrowing costs and difficulty attracting foreign investments. Abir stressed that the government must focus on reducing the budget deficit and controlling the debt-to-GDP ratio to prevent penalties from global markets.

Effects on Key Sectors and Future Outlook

The war has impacted several areas of Israel’s economy, especially those that need a large workforce. Economic growth slowed to 2% last year, almost half of what was expected. Restrictions on Palestinian workers from the West Bank, who are key in sectors like construction, have caused further strain. The call-up of military reservists to secure borders has also reduced the workforce available for other industries.

Despite these immediate challenges, the Bank of Israel remains hopeful about the longer-term outlook. Abir pointed out that consumer spending is holding up, and the job market remains strong, with wages growing by 7% over the past year. He believes that the economy is still strong enough to recover once the conflict ends.

Strategies to Support Economic Recovery

The Bank of Israel suggests that the government should focus on managing its finances carefully and invest strategically to support economic growth. This could include prioritizing projects that create jobs and encourage spending, as well as supporting technology and innovation sectors that are vital to Israel’s economy.

Clear communication with international investors is also important to maintain trust in the economy. Keeping a strong level of foreign exchange reserves and managing inflation expectations will help ensure economic stability in the months ahead.

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