Citing Gaza war uncertainty, Israel's monetary policy committee votes to leave benchmark interest rate unchanged

Four of the five members of the Bank of Israel's monetary policy committee voted on Feb. 26 to leave the benchmark interest rate (ILINR=ECI) unchanged at 4.5 percent, meeting minutes showed on Monday, citing uncertainty over the trajectory of Israel's war with Hamas militants in Gaza.

One policymaker voted to lower the key rate by a quarter of a percentage point to 4.25 percent.

In January, the central bank lowered the rate by a quarter-point from 4.75 percent, cutting for first time in nearly four years.

Prior to the rate cut, policymakers had held rates steady for four straight decisions, following 10 straight rate increases that had taken the policy rate up from 0.1 percent in April of 2022.

It noted that economic activity indicators showed a gradual improvement in activity, after a notable contraction in business activity with the eruption of the war on Oct. 7, while market volatility had moderated and financial markets were operating properly.

Still, "the level of uncertainty regarding the expected scope and duration of the fighting is very high, and this impacts as well on the extent of the adverse impact on activity," the minutes said.

Israel and Lebanon's Hezbollah have been trading fire since the Hamas attack on Israel, fuelling concern about the danger of all-out war between the adversaries.

The central bank had said in January that its rate cut cycle would be slow to maintain financial stability, even as inflation continues to ease - reaching a 2.6 percent rate in January.

"In view of the war, the monetary committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity," it said.

Despite the war and a credit rating downgrade by Moody's, the shekel is stable and near its strongest level of 2024.

But policymakers remained wary, pointing to a still high risk premium for Israel as measured by credit default swaps and a wide spread between Israel's dollar-denominated government bonds and U.S. government bonds.

Since the rates decision, Israel sold a record high $8 billion of dollar-denominated bonds in robust demand.

The war has dented Israel's economy, contracting by nearly an annualised 21 percent in the fourth quarter from the prior three months. Growth was 2 percent in all of 2023.

Reuters