JERUSALEM- The Bank of Israel remains concerned about a re-emergence of inflation, partly due to the ongoing war with Hamas, despite cutting rates for the first time in nearly four years this month, minutes of the discussion showed on Monday.
The 25 basis point reduction on Jan. 1 that took the central bank’s benchmark interest rate to 4.5 percent was somewhat expected and supported by all five members of the monetary policy committee (MPC).
Policymakers cited moderating inflation with the headline rate dipping to 3.3 percent year-on-year in November and expectations of a return to its 1-3 percent target in the first quarter, as slowing global activity helps ease imported price pressures.
MPC members nonetheless emphasized the risk of another pick up in inflation due to factors such as the effects of the war and its development on economic activity as well as a depreciation of the shekel.
Another risk, they added, is the inflationary impact of fiscal expansion to fund defense and civilian expenditure, if not offset by cuts elsewhere.
Israel’s cabinet on Monday approved an amended 2024 budget adding 55 billion shekels ($15 billion) of extra spending, mainly to finance the war with Palestinian Islamist group Hamas and compensate citizens affected by the Oct. 7 attacks by their gunmen. The boost is projected to push the budget deficit to around 7 percent of gross domestic product.
