Israel Economy Hammered By War With Hamas – Central Bank Holds Rate At 4.75%

The Oct. 7 attack by Gaza-based Palestinian militant group Hamas has not only exacted a bloody toll on Israel, but now a mounting economic one as well. That reality was underscored by Tuesday statements issued by the country’s central bank, which simultaneously warned about the economic road ahead while assuring markets that the bank would take efforts to dampen the war’s impact. 

The Bank of Israel said it has revised its macroeconomic forecast in light of the war, but noted the projection “is accompanied by particularly high uncertainty.” Much of that uncertainty pivots on the future scope of warfare, which has the potential to explode into a regional conflagration involving Lebanon-based Hezbollah, Iranian-backed Shiite militias, Iran and other states forces. 

The size of the conflict will be driven in part by Israel’s actions. The Israel Defense Forces (IDF) is reportedly eager to plunge into a full-on ground invasion of densely-populated Gaza, while civilian leaders have yet to give the go-ahead. For its projection, the bank used a relatively optimistic scenario: “Under the assumption that the war will be concentrated on the southern front during the fourth quarter of the year, GDP is expected to grow by 2.3% in 2023 and by 2.8% in 2024.” The bank had previously projected 3.0% for both years.   

Since the Hamas attack that killed some 1,400 people in Israel, the TA-35 Index comprising 35 large, Israel-listed companies has shed 9%, while the shekel has fallen more than 5% against the US dollar — an 8 1/2-year low. Ratings agencies like Fitch and Moody’s have signaled Israel’s credit rating could be downgraded. 

The top-down indicators are underscored by plenty of anecdotal reporting from Israel. The Financial Times points to a brewery where production has plunged from 50,000 litres of beer a month to zero since the attacks. Only 2 of the brewery’s chain of 14 restaurants are still open, and traffic is sparse. The lunch crowd at one plunged from a typical 50 to 100 people to just five last Thursday. 

Many businesses that are trying to persevere find themselves short-staffed thanks to the call-up of some 360,000 military reservists. Aside from US politicians eager to turn the grim situation into a photo opportunity, tourism has been slammed, with major airlines cancelling flights after Palestinian rockets targeted Ben Gurion Airport.  

Just landed to Israel’s Iron Dome intercepting rockets from Gaza. Passengers huddled in hard cover on the tarmac Ben Gurion Airport. With CNN’s Nic Robertson and producer, Muhammed Darwish. pic.twitter.com/orJ3CvJhrt

— John Torigoe (@jtorigoe) October 7, 2023

The situation creates a pick-your-poison situation for the Bank of Israel as it contemplates interest-rate policy: Cutting rates might help ease economic pain, but at the cost of further setbacks for the shekel. This week, it chose to keep Israel’s benchmark short-term borrowing rate at 4.75%, saying its goal was “stabilizing the markets and reducing uncertainty.”

The target has held at 4.75% for two consecutive meetings. This new plateau comes after 10 rate hikes that have lifted the rate from close to zero. The bank signaled the rate will drop to the 4% to 4.25% range over the next year. 

“The situation remains fluid and uncertain, which means that the Bank of Israel could bring rate cuts forward should the projected negative impact on growth become more prevalent or longer-lasting than immediate FX depreciation risks,” wrote a team of Morgan Stanley analysts. 

Meanwhile, Gaza’s economy, which was about 95% smaller than Israel’s before the Hamas attack, is suffering far worse consequences from the war… 

Drone footage shows the scale of destruction in the al-Zahra neighbourhood in Gaza following Israeli airstrikes.

More than a million Palestinians have been left homeless after Israeli airstrikes on Gaza left entire neighbourhoods in the crowded territory completely flattened pic.twitter.com/oMSr6l9MIe

— Middle East Eye (@MiddleEastEye) October 23, 2023