JERUSALEM

Amid growing concerns in Israel about the war's impact on the economy, Israel on Monday announced keeping the interest rates at 4.5% amid the ongoing war uncertainty and fears of inflation.

The inflation in Israel currently stands at 2.8%, but it may increase in the upcoming months amid the continued war spending.

On Monday, the Bank of Israel, however, said the economic activity in the country continues to gradually recover.

It added that the continued state of geopolitical uncertainty reflects high economic risks.

While the Israeli economy registered a growth of 14.1% in the year's first quarter, it is still witnessing shrinking on an annual basis, with 1.4%.

Israeli financial analysts expect that the hypothesis of ending the war in the last quarter of this year means that the local demands on the consumption of goods and services will return.

This also comes amid efforts to rebuild the settlements, damaged by the ongoing war, near the Gaza Strip and in northern Israel, meaning that higher consumption may cause inflation.

Under these conditions, the Bank of Israel sees that the upcoming months are crucial in curbing inflation by preserving high interest rates for a longer period.

“The cumulative annual deficit is expected to continue to climb in the coming months, and to converge back to an environment similar to the current one toward the end of 2024, provided that there are no notable deviations in security expenditures,” the Bank of Israel said.

The bank added that the Israeli market saw some signs of inflation, whereas the consumer price index for March rose to 0.6% on a monthly basis, and in April to 0.8%.

In this context, the return of inflation means a rise in interest rates, which will increase the burden on borrowers in Israel and on the export sector.

Israel has continued its brutal offensive on the Gaza Strip since Oct. 7, 2023, following a Hamas attack despite a UN Security Council resolution demanding an immediate cease-fire in the enclave.

Nearly 36,100 Palestinians have since been killed in Gaza, the vast majority being women and children, and over 81,000 others injured, according to local health authorities.

Nearly eight months into the Israeli war, vast swathes of Gaza lay in ruins amid a crippling blockade of food, clean water, and medicine.

Israel stands accused of “genocide” at the International Court of Justice, which in its latest ruling has ordered Tel Aviv to immediately halt its operation in Rafah, where over a million Palestinians had sought refuge from the war before it was invaded on May 6.

* Writing by Ahmed Asmar