Amir Yaron called on officials to work to enhance the confidence of markets and rating companies in the Israeli economy (Reuters)

The Central Bank of Israel left interest rates unchanged, after reducing them by a quarter of a percentage point last January, due to uncertainty about the expected duration of the war on the Gaza Strip, which will keep the pace of interest rate cuts this year gradual, according to the Israeli newspaper The Jerusalem Post.

By keeping interest rates at 4.5%, the central bank acknowledges that the war had “significant economic consequences” on real activity and on financial markets.

Difficult months

The Governor of the Bank of Israel, Amir Yaron, said during a press conference: “It has been a difficult 4 months for Israel... In addition to security issues, the war also brings with it noticeable economic repercussions. It affects economic activity in general and financial markets, and the state of uncertainty remains high.” ".

He added that although there is a great deal of uncertainty regarding the severity of the war and its expected duration, Israel's economy "usually recovers after military conflicts and quickly returns to prosperity."

Israel's economic losses due to the Gaza war (Al Jazeera)

Inflation

He said that one of the factors that led to maintaining the interest rate was the increase in budget spending to finance the war, which “represents a risk to the continued moderation of inflation,” which fell to a rate of 2.6% in January, within a target rate of between 1% and 3%.

Yaron indicated last January that the pace of reducing interest rates would be gradual.

He noted that inflation rates have moderated in many countries around the world, but they are still higher than the goals of central banks, with their governors concerned about service price levels, which has led to a retreat from monetary easing.

Before the rate cut last January, the Bank of Israel raised rates 10 consecutive times in a strong tightening cycle from an all-time low of 0.1% in April 2022, before pausing last July.

The economy shrank by 19.4% annually in the last quarter of last year, reflecting the losses of the war, to end 2023 with growth of 2%.

Varied performance of industries

The Central Bank said: “Indicators of economic activity and employment status indicate a gradual recovery after the sharp decline that occurred with the outbreak of war, but there is a discrepancy between (the performance of) industries.”

Yaron expressed his concern that the construction sector would be affected by the shortage of workers, after Palestinian workers were prevented from working in Israel.

In the wake of Moody's downgrade of the credit rating this month, triggered by uncertainty over the war, Yaron said it was clear that markets had taken the downgrade into account.

He added: “To enhance the confidence of markets and rating companies in the Israeli economy, it is important that the government and the Knesset (Parliament) move to deal with the existing economic issues, which requires structural changes in the ministries and prioritizing growth engines.”

Source: Israeli press