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BoI leaves interest rate unchanged, warns of inflation

The Bank of Israel said it would focus on "stabilizing the markets and reducing uncertainty," with the economy showing gradual recovery.

Governor of the Bank of Israel Amir Yaron (left) attends a committee meeting at the Knesset in Jerusalem, July 19, 2023. Photo by Yonatan Sindel/Flash90.
Governor of the Bank of Israel Amir Yaron (left) attends a committee meeting at the Knesset in Jerusalem, July 19, 2023. Photo by Yonatan Sindel/Flash90.

Israel’s Central Bank on Monday left its benchmark interest rate unchanged at 4.5% in line with expectations, but warned of “geopolitical uncertainty” and inflation.

Economic activity and the labor market are recovering gradually, the Bank of Israel Monetary Committee said in its latest decision, noting National Accounts data showed improvement in business activity in the first quarter following a “notable contraction” at the war’s start.

Business activity, however, hasn’t returned to its pre-war levels. GDP expanded by 3.35% in the first quarter over the previous quarter, but remains 2.8% lower than it was pre-war. The bank cited supply constraints as the main reason.

In the construction industry, this includes a shortage of workers. As of April, the number of employees in the industry is reported to be about 20% lower than in the pre-war period.

There is also a shortage of equipment and raw materials. In April, 18% of manufacturing companies and 16% of companies in the construction industry reported constraints on growth for this reason.

In the past 12 months, home prices rose by a cumulative 1.1%.

“The constraints in the construction industry, due to the shortage in workers and in raw material and equipment, alongside the need for housing solutions for those evacuated from their homes because of the war, are liable to make further moderation of housing and rental prices difficult,” said the central bank.

The Monetary Committee also warned of increasing inflation, which rose to 2.8% in April, the upper end of the bank’s 3% target range.

The committee noted several risks for a potential acceleration in inflation, including geopolitical developments, depreciation of the shekel, continued supply constraints on the construction and air travel industries, fiscal developments and global oil prices.

The labor market continues to recover. In March, the employment rate grew and in April it remained stable, at a level slightly lower than before the war.

The bank defined its goal as focusing on “stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity.”

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