The Israeli economy is facing challenges as conflicts on several fronts have persisted for over a year, leading to a 3.4% depreciation of the shekel against the dollar. The Bank of Israel is expected to hold its interest rate at 4.5% for the sixth time in a row, influenced by inflationary pressures from ongoing wars in Gaza and Lebanon, as per a Bloomberg report citing 16 analysts. Despite a global trend towards lowering rates, the Bank of Israel finds its hands tied, with Governor Amir Yaron indicating that rate cuts may not be considered until the latter half of 2025 due to the economic slowdown affecting sectors like tourism, agriculture, and construction.
The shekel's decline since late August and a peak in Israel's credit risk premium in 12 years were also noted in the report. The expansion of military operations to Lebanon and Iran, alongside the Palestinian conflict and halted ceasefire negotiations, have exacerbated the economic downturn. Recent credit downgrades by Moody's and S&P Global Ratings were highlighted, pointing out the strain on Israel's fiscal health, with the budget deficit reaching 8.3% of GDP by August.
Adjustments to the 2024 budget, including spending cuts and tax increases, are being considered to address the fiscal challenges. Bloomberg mentioned that without a shift towards more conservative fiscal policies, the Bank of Israel might be compelled to increase interest rates to manage inflation, which is expected to rise to 5% in early 2025.
Source: Almayadeen.net