By Joshua Kirby


Israel's central bank kept its benchmark interest rate in place, stressing the need for stability amid continued military conflict.

The Bank of Israel's policy committee decided Monday to leave the rate at 4.50%, just 25 basis points below the level it stood at before October, when Hamas militants attacked communities in southern Israel and the latter retaliated with an aerial bombardment and ground invasion of the densely-populated Gaza strip. Israel has also stepped up controls in the occupied West Bank and targeted Hezbollah in southern Lebanon.

The war has dealt a severe blow to Israel's economy, which lost about a fifth of its total value on year in the last three months of 2023. Nevertheless, the effects are expected to lessen throughout 2024, and the economy should grow by 2.0% over the course of the year, according to the bank's forecasts.

"Indicators of economic activity and employment point to a continued gradual recovery following the sharp decline that took place with the outbreak of the war," the bank said. "Expansion of activity has mainly been due to recovery of demand. Supply constraints remain high in a number of industries."

With continuing conflict, the bank said its focus remains on stabilizing markets and reducing uncertainty, including keeping inflation within a target range. Inflation could be driven higher again by the depreciation of the Israeli shekel, rising oil prices and the developments of the war, the bank cautioned. Geopolitical uncertainty has also increased, including Israel's own risk premium, it added.

Any potential rate cuts later in the year will be dependent on these risks calming, said William Jackson, chief emerging markets economist at Capital Economics. The bank's nod to the recent escalation of tensions with Iran--following a strike on an Iranian consulate in Damascus that killed several Iranian military commanders--shows where its focus lies, Jackson wrote in a note.

"Rate cuts will... be contingent on the geopolitical risks currently worrying the Bank of Israel fading," he said, adding that he still expects the bank to cut rates to 4.00% by the end of the year. "But the risk now is that rates stay even higher than we are currently forecasting," Jackson said.


Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby


(END) Dow Jones Newswires

04-08-24 1027ET