In a decisive move aimed at bolstering economic growth amid ongoing geopolitical challenges, the Bank of Israel Monetary Committee, led by Governor Prof. Amir Yaron, has announced a 0.25% reduction in the interest rate to 4.5%. This marks the first interest rate cut in Israel since the initial days of the Covid-19 pandemic in March 2020.
Finance Minister Bezalel Smotrich expressed support for the decision, attributing the decrease in inflation to the responsible fiscal policies implemented over the past year. Smotrich emphasized that the interest rate cut aligns with the goal of fostering business growth and overall economic recovery during the ongoing uncertainties associated with the conflict.
This move comes after a series of 10 consecutive rate hikes between April 2022 and May 2023, which elevated the rate from a historic low of 0.1% to 4.75%. The Bank of Israel's proactive approach aimed to combat rising inflation, which peaked at 5.3% in January 2023, subsequently declining to 3.3% in November.
Forecasts indicate a further decrease to 3% in the upcoming month, within the 1%-3% target range. Anticipated inflation rates stand at 2.4% by the fourth quarter of 2024 and 2% by the same period in 2025.
Yaron anticipates that today's rate cut is the initial step in a series of reductions throughout the year. "The research department’s forecast assesses that the interest rate will be 3.75%-4%, on average, in the fourth quarter of 2024—a more moderate path of decline than that assessed by the market,” he said.
Economic concerns due to conflict
In tandem with the interest rate adjustment, the Bank of Israel maintained its growth forecast for 2024 at 2%, with consistent projections for 2023 and a robust 5% growth expected in 2025. The Bank acknowledged the heightened uncertainty in the economic outlook, particularly in relation to governmental decisions concerning defense and civilian needs arising from the ongoing conflict.
The Bank of Israel emphasized that given the ongoing conflict, the Monetary Committee's strategy is centered on stabilizing markets, alleviating uncertainty, ensuring price stability, and bolstering economic activity. The trajectory of interest rates will be decided based on the ongoing alignment of inflation with its target, sustained stability in financial markets, economic performance, and fiscal policies.
Dobi Amitai, chairman of the presidency of the business sector, commended the decision to lower the interest rate as a bold move that demonstrates monetary leadership.
Amitai asserted that the current measures set the stage for the next growth cycle, turning containment processes into conditions for economic advancement. “Lowering the interest rate will help curb the economic slowdown and the recovery of the economy,” he said.