Israel's Central Bank held its benchmark interest rate steady despite easing inflation. Although inflation readings have fallen, the prospect of military clashes with Iran has peaked, and geopolitical risk has outweighed economic indicators.
Israel's Central Bank said on the 23rd (local time) that it would keep the benchmark rate at 4.0%, noting, "In recent days, geopolitical uncertainty is resurfacing due to the potential for a clash with Iran." The Central Bank judged that, despite inflation moving within the target range, developments on the geopolitical front, supply constraints, and fiscal factors still pose risks that could reignite inflation.
Market analysts had expected a 0.25 percentage point cut on the grounds of slowing inflation and a stronger shekel, but the Central Bank opted for a "defensive hold." Israel previously cut rates twice, by 0.25 percentage point each, in Nov. last year and Jan. this year.
The decision to hold rates drew fierce criticism inside Israel. Finance Minister Bezalel Smotrich wrote on his social network service (SNS) that it was "a wrong decision not supported by macroeconomic data," adding, "The shekel is strong and prices are stable, yet high rates are blocking economic recovery," directly criticizing Central Bank Governor Amir Yaron. The Manufacturers Association of Israel also told the Times of Israel it "ignored the strong shekel issue that is eating away at export competitiveness," expressing deep regret.
In fact, Israel's business community has shifted into a "war mode" in anticipation of a possible clash with Iran. According to the Jerusalem Post, the U.S. Navy's Gerald R. Ford carrier strike group entered Haifa in northern Israel on the 23rd, with additional support forces arriving in sequence. Haifa, home to a concentration of major refineries, is considered a strategic stronghold and a likely target for Iranian retaliation.
If armed conflict materializes, there are concerns the shekel could plunge and supply chains could seize up, sending recently-tamed prices soaring again. As a result, the Central Bank is seen prioritizing defense of the exchange rate and cushioning price volatility over stimulus.
Meanwhile, the United States and Iran are set to resume nuclear talks on the 26th in Geneva, Switzerland. With bilateral dialogue—halted in June last year in the wake of the "12-day war"—resuming this year, attention is on whether the outcome can dispel the drumbeats of war in the Middle East and bring changes to Israel's currency policy.