Israel's war with Palestinian militant group Hamas has upended expectations of where Israeli short-term interest rates are headed as policymakers try to balance a sliding shekel and slowing economy with already above-target inflation.
Less than three weeks ago markets and analysts were predicting at least one more rate hike by early 2024, possibly as soon as this week, after an aggressive run of tightening that took the benchmark interest rateon Israel's civilians in the country's history on Oct. 7, expectations swung to focus on sharp rate cuts before settling on a slightly softer easing path.
When markets opened on the Monday after the attack, the shekel slid more than 2.5% in its biggest daily decline since the market turmoil of March 2020, the early days of the COVID-19 pandemic. The Bank of Israel launched ato shore up the currency and fend off inflationary pressure with price growth already running at 3.8% in September, above its 1%-3% annual target.
Yaron said Israel's risk premium, which has risen sharply, first needed to decline while market stability was paramount. He argued that other steps targeting deferred loan repayments were de facto monetary easing. Israel's next rate decision is due on Nov. 27 with markets currently expecting rates to be held, and the three-month TELBOR rate pointing to a 25 bps cut in early 2024.
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