Bank of Israel Faces Inflation Risks Following Refusal to Cut Interest Rate due to Massive War Spending

By Thea Felicity

May 27, 2024 01:29 PM EDT

This picture taken on August 23, 2022 shows a view of the exterior of the headquarters of the Bank of Israel, the country's central bank, in Kiryat Ben-Gurion in Jerusalem.
(Photo : AHMAD GHARABLI/AFP via Getty Images)

Despite the lingering impacts of war-related budget strains, the Bank of Israel has chosen to maintain its benchmark interest rate, refraining from implementing further cuts, which, in return, puts the country at risk of inflation.

In its recent decision reported by Bloomberg, the bank listed a myriad of concerns, including the potential for inflationary pressures, currency depreciation, and supply chain disruptions in key sectors like construction and air travel. 

Now, analysts believe the reluctance to adjust interest rates reflects a cautious approach by Israeli policymakers, who are grappling with the economic fallout from prolonged conflict with Hamas and continued military engagements in the region. 

READ MORE: Egypt Greenlights UN Aid Through Israel's Crossing to Gaza; Rafah Conflict Raises Doubts

Israel's Economy Faces Uncertainty

Despite a modest rebound in economic activity during the first quarter, the trajectory of Israel's recovery remains uncertain. GDP is still trailing pre-war levels, indicating the challenges that lie ahead. 

Rating agency forecasts paint a mixed picture. S&P Global Ratings and Moody's Investors Service project a subdued growth outlook, contrasting with the Bank of Israel's more optimistic forecast. 

With inflation on the rise and expectations for further price increases in key commodities like food and air travel, the central bank is faced with a delicate balancing act. It must support economic recovery while curbing inflationary pressures, a task that requires careful navigation. 

Market analysts suggest that the Bank of Israel must adjust interest-rate expectations while stressing stability before any major market corrections can be expected.

READ NEXT: Despite Biden Administration Pause, Billions of Dollars Worth of US Weaponry Still Due to Go to Israel

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