Despite economic turmoil, Israel's interests set to remain at 4.75%

Despite signs of ongoing economic turbulence, the Bank of Israel is expected to maintain the interest rate at its current level of 4.75% this month. This decision is likely to be made due to recent decreases in inflation and indicators pointing towards modest economic growth, according to Bank Leumi’s Chief Economist Dr. Gil Michael and National Capital Markets Strategist Dudi Reznik in their latest economic review.

The review noted that people in Israel are spending less with their credit cards compared to a few years ago. This shows that people are being careful with their money, which could continue to impact the country’s inflation. When consumers spend less and save more, it can lead to reduced demand for goods and services, potentially lowering prices. Additionally, lower consumer borrowing and decreased investment by businesses may further dampen inflation.

While the Bank of Israel is expected to keep interest rates steady, the rate at which the Israeli economy is growing has slowed down compared to recent years. In July 2023, the Composite Index — a measurement for examining the direction of economic development —  recorded a modest increase of 0.17%, in contrast to the 0.35% average monthly change seen in 2019.

One major concern is that the export of hi-tech services from Israel has been slowing down, which means there is less demand for workers in the hi-tech industry. This could continue for a few more months and might affect how well the economy does, its trade balance, and the number of jobs available.

As a contrasting benchmark, the United States has delivered a positive employment report for August, exceeding market expectations. It reveals higher job growth than anticipated, revisions upward for previous months, an increase in workforce participation, a slight decline in wage growth, and a minor uptick in the unemployment rate.

Quality bonding time

In the government bond market, there have been recent expectations that interest rates in the United States will go down, which in turn has led investors to believe that interest rates in Israel will stay the same.

The corporate sector has experienced a noteworthy increase in profit margins. Also, the interest rates on certain types of bonds — specifically non-linked shekel bonds, which are chosen by investors when inflation is expected to remain low or stable — have been going up after staying stagnant for a while. The recent drop in the shekel's value likely played a part in pushing up the interest rates on these bonds, though it is important to note that many factors can influence interest rates, and not just currency value.