BoI holds rates at 4.5%

The Bank of Israel kept interest rates steady on Monday after cutting by a quarter-point in January, citing uncertainty over expected duration of the war in Gaza that will keep the pace of rate reductions this year gradual.

In keeping its benchmark rate at 4.5%, the central bank said the war was having “significant economic consequences” on real activity and on the financial markets.

“It has been four difficult months for Israel,” Bank of Israel Governor Amir Yaron told a press conference. “Beyond security issues, the war brings with it marked economic ramifications as well. It impacts on economic activity overall and on the financial markets, and the uncertainty remains high.”

Israel’s war against Palestinian militant group Hamas began on Oct. 7 after Hamas gunmen rampaged through Israeli towns.

Yaron said that while there was great uncertainty with regard to the expected severity and duration of the war, Israel’s economy “rests on solid and resilient foundations” and typically recovers after military conflicts and “returns rapidly to prosperity.”

One factor in holding rates this decision, he said, was higher budget spending to finance the war and which “presents a risk to the continued moderation of inflation” that has eased to a rate of 2.6% in January, within an official 1-3% target.

Yaron said that worldwide, the inflation environment has moderated in many countries but remains above central banks’ targets, with central bankers worried over inflation in services, which has pushed back monetary easing.

Analysts polled by Reuters were split ahead of the decision, with seven expecting no move and seven projecting another 25 basis point reduction. They believe the key rate will drop to 3.5% to 4% during 2024.