Bank of Israel to hold rates even as inflation rises: Reuters poll

By Steven Scheer

JERUSALEM (Reuters) - The Bank of Israel (BoI) will keep short-term interest unchanged for a sixth straight policy meeting on Wednesday, as markets maintain their view rising inflation due to the Israel-Hamas war will not lead to lower rates until next year, a Reuters poll showed.

All 14 economists polled said they expected the central bank to hold its benchmark rate at 4.5% when the decision is announced on Wednesday at 4 p.m. (1300 GMT).

Driven by supply issues, Israel's annual inflation rate accelerated to a 10-month high of 3.6% in August from 3.2% the previous month, above the government's 1-3% target range. It fell to as low as 2.5% in February.

In contrast, Israel's economy grew by a scant annualised 0.7% in the second quarter, or a 0.9% contraction on a per capita basis.

"A prolonged war on multiple fronts could weaken economic activity further and heat inflation, raising the risk of stagflation," Barclays economist Zalina Alborova said.

Since Oct. 7, 2023, Israel has largely been fighting Palestinian Islamist group Hamas in Gaza in Israel's south. But in response to a year of rockets by Hezbollah, Israel has escalated attacks on Hezbollah in Lebanon in the north - and fears have grown the conflict could widen to Iran.

Meitav Dash brokerage chief economist Alex Zabezhinsky said that in normal times, rising inflation, a weaker shekel that adds to price pressures, and a tight labour market would lead to a rate hike but, the war has "forced" the Bank of Israel to hold the line on rates.

Central bank officials have said they expect rates to stay put until sometime in 2025, while U.S. and European rates look set to decline further. The bank had cut rates 25 basis points in January, but has since kept them steady.

"Obviously, in this situation interest rate reductions are not on the agenda and markets imply some probability for a rate hike in the coming months," Bank Hapoalim economist Victor Bahar said.

However, Bahar doubted that in a low growth environment the Bank of Israel would raise rates.

"If the security situation causes an accelerated depreciation of the exchange rate, it is more likely that we will see an intervention by the Bank of Israel in the foreign exchange market, as it did at the beginning of the war," he said.

The shekel has been volatile. It is up 0.5% versus the dollar on Monday but 2% weaker so far in October and down 5% this year.

Also on Wednesday, the central bank will issue updated macro forecasts and Bank of Israel Governor Amir Yaron is scheduled to hold a news conference at 4.15 p.m.

(Reporting by Steven Scheer; editing by Barbara Lewis.)