By Steven Scheer
JERUSALEM, March 30 (Reuters) – The Bank of Israel’s governor held out the prospect of a further short-term interest rate cut after leaving the policy rate unchanged on Monday for a second straight month due to inflation pressures from the Iran war that has driven up oil prices.
After cuts in November and January following a ceasefire in Gaza, the central bank kept its benchmark rate at 4% last month and again on Monday.
While many other global central banks consider hiking their borrowing costs in the face of rising oil prices, Governor Amir Yaron said Israel’s situation was different, noting that its rate is still far higher than those in the U.S. and Europe.
“Depending on (inflation) developments meeting expectations, it is possible to make another cut or two… but there are no promises regarding the interest rate,” Yaron told a news conference.
In updated forecasts, the bank projected an interest rate of 3.5% to 3.75% in a year’s time and inflation at 2.3%, up from the 2.0% reported last month.
For now, the bank is more focused on geopolitical uncertainty caused by the war with Iran and fighting with Iran-backed Hezbollah militants in Lebanon and their impact on the economy.
GROWTH FORECAST TRIMMED BACK
Yaron said some indicators had begun to reflect the effects of the conflict, such as consumer spending, tourism and an adverse impact on labour supply due to employee absences and the call-up of military reserves.
As a result, the central bank trimmed its economic growth estimate for Israel to 3.8% in 2026 from a previous 5.2% and raised its 2027 estimate to 5.5% from 4.3%. Forecasts are based on fighting ending by the end of April.
“Wars — especially those that last for a prolonged period — are accompanied by high inflation, and by a considerable negative impact on GDP,” Yaron said, adding that Israel’s economy had shown resilience during the two-year Gaza war.
Earlier on Monday, lawmakers gave final approval to a defence-heavy 2026 state budget. Yaron criticised tax cuts and higher spending on non-defence items that will raise the deficit and Israel’s debt burden. Adjustments will be needed in 2027, he said.
All 13 economists polled by Reuters had projected no rate move on Monday, citing the U.S. and Israeli strikes launched on February 28 that have resulted in Iran largely shutting the Strait of Hormuz.
The shekel weakened by 0.6% on Monday to 3.1675 to the dollar, close to a 2026 low, after reaching a 30-year peak in mid-February.
(Reporting by Steven ScheerEditing by Andrew Cawthorne and Gareth Jones)
Comments