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Citing war uncertainty, Bank of Israel keeps rates steady at 4.5 per cent

An Israeli flag flutters outside the Bank of Israel building in Jerusalem August 7, 2013. REUTERS/Ronen Zvulun/File Photo
An Israeli flag flutters outside the Bank of Israel building in Jerusalem August 7, 2013. REUTERS/Ronen Zvulun/File Photo

The Bank of Israel kept interest rates steady on Monday after cutting by a quarter-point in January, citing uncertainty over expected duration of the war in Gaza.

The central bank said the war was having “significant economic consequences, both on real activity and on the financial markets”.

“There is great uncertainty with regard to the expected severity and duration of the war, which is in turn affecting the extent of the impact on activity,” its statement said.

Israel’s war against Palestinian militant group Hamas began on Oct. 7.

Analysts polled by Reuters were split ahead of the decision, with seven expecting no move and seven projecting another 25 basis point reduction.

The central bank kept the benchmark rate (ILINR=ECI) at 4.5 per cent.

Prior to January’s cut, it had raised rates 10 straight times in an aggressive tightening cycle from a all-time low of 0.1 per cent in April 2022, before pausing last July.

Israel’s inflation rate eased to 2.6 per cent in January, within the annual target range of 1 per cent-3 per cent.

The economy contracted by an annual 19.4 per cent in the fourth quarter, reflecting the toll of the war with Hamas, to end 2023 with growth of 2 per cent.

“Indicators of economic activity and the state of employment point to a gradual recovery following the sharp decline that took place with the outbreak of the war, but there is variance between industries,” the central bank said.

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