Bank of Israel leaves lending rate at 4.5%, but warns inflation could ramp up

The Bank of Israel is leaving interest rates unchanged at 4.5 percent, noting that consumer prices are still on the rise and warning of increasing inflationary pressures as seven months of war with Hamas continue to bite into the economy.

This is the third consecutive time officials have decided to leave the rate at 4.5%.

The Bank of Israel’s monetary policy committee cites “several risks of a potential acceleration in inflation: geopolitical developments and their effects on economic activity, a depreciation of the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices.”

The last rate cut came in January, as the bank reduced the base lending rate for the first time in almost four years by 25 basis points, from 4.75%, to support households and businesses battered financially by the war, and thanks to an easing inflation environment at the time.

Ahead of the interest rate decision, economists were in consensus for interest rates to remain steady and forecast that borrowing costs for mortgage and loan holders would stay high in the coming few months amid heightened inflationary pressure, persistent regional tensions, and higher fiscal spending as defense costs rise.

Consumer prices in Israel over the past two months quickened at a faster pace than forecast, led by an increase in housing prices and higher travel and transportation costs, according to data by the Central Bureau of Statistics.

Year-over-year inflation accelerated to 2.8% in April, up from 2.7% in March, and 2.5% in February. The government’s annual target range of inflation is 1% to 3%.