The Governor of the Bank of Israel decided to leave the interest rate in the economy unchanged at 4.75%. This decision was made in response to the war declaration and is intended to help mitigate the heavy costs associated with the war.
If it weren't for the war, the governor was supposed to lower the interest rate by a quarter to half a percent, considering the inflation outlook and the recent economic indicators.
"Before the war, the Israeli economy was characterized by a surplus in the current account, a low debt-to-GDP ratio, and high foreign exchange reserves. Economic activity in Israel remained high, despite a slowdown in growth recorded in recent months, and a tight labor market with full employment. Inflation is stabilizing but still above the target and greatly affected by the development of the exchange rate," stated the Bank of Israel.
The consumer price index decreased
Furthermore, it was decided not to lower the interest rate, but rather to keep it unchanged. "Since the previous policy decision, the Consumer Price Index for September 2023 decreased by 0.1% after rising by 0.5% in August. In the last twelve months, inflation has remained above the upper limit of the target and stands at 3.8%. Inflation in Israel is lower than inflation in most developed countries."
Against the backdrop of the decrease in demand and supply constraints due to the war, there is also significant uncertainty about the future inflation development. The committee estimates that the current monetary policy supports inflation converging to its target. Exchange rate fluctuations pose a significant risk to the pace of inflation, and the exchange rate development in the coming months will have an impact on it.