POLL-Bank of Israel to keep rates on hold after April inflation jump

By Steven Scheer

JERUSALEM, May 22 (Reuters) - The Bank of Israel is expected to leave short-term interest rates unchanged at its policy meeting next week after inflation accelerated last month amid economic uncertainty exacerbated by Israel's war against Palestinian militant group Hamas.

All 14 economists polled by Reuters said they expected the central bank to keep its benchmark rate ILINR=ECI at 4.5% when the decision is announced on Monday at 4 p.m. (1300 GMT).

Israel's annual inflation rate accelerated to 3.6% in April - against an expected slowdown to 3.1% from 3.3% in March - above its 1-3% target.

Much of the April gain stemmed from a spike in airfares, though inflation has been underpinned through the year by price gains in a host of goods including water and electricity, as well as some taxes that rose at the start of 2025.

The government also partly blames war-related supply issues for sticky inflation.

"The Bank of Israel is currently closer to the Fed than to the European banks - that is, in a wait-and-see position," Bank Hapoalim economist Victor Bahar said.

"Israel’s monetary policy will be fairly coordinated with the Fed, assuming that the tariffs in the U.S. will not remain in place for long."

Based on bond yields, financial markets still expect inflation to ease to 1.8% in the coming year, according to Bank of Israel data, as well as two rate cuts later in 2025 as projected by the central bank's own economists.

"The Bank of Israel will leave policy unchanged until it has significantly more conviction that loosening will not reignite inflation," said Citi economist Michel Nies, citing the tough task of a cooling labour market where the supply of jobs is constrained.

Goldman Sachs' Johan Allen said that the central bank may look past the higher airfares "if there is continued disinflation across other core categories".

One bright spot for inflation has been a stronger shekel ILS=, which has gained 1% against the dollar over the past month.

At the same time, Israel's economy grew an annualised 3.4% in the first quarter from the prior three months. Nies, who foresees rate cuts resuming in November and accelerating in 2026 to a 3% rate, noted that policymakers "might need to maintain GDP growth below potential for longer in order to realign demand with the new supply reality."