By Steven Scheer and Ari Rabinovitch
JERUSALEM (Reuters) -The Bank of Israel kept short-term borrowing rates unchanged for a fourth straight decision on Monday and said that it was too soon to lower interest rates due to economic and financial uncertainty during Israel's war against Hamas.
The central bank held its benchmark rate at 4.75% - its highest level since late 2006. It had raised rates 10 straight times in an aggressive tightening cycle that has taken the rate from 0.1% last April before pausing in July and again in August and October.
All 14 economists polled by Reuters had forecast no rate change but with inflation coming down and the economy set to slow as a result of the war, analysts believe rate cuts could begin at the subsequent policy decision on Jan. 1, 2024.
"We need to recognise the fact that we are still in an environment of very high uncertainty," Bank of Israel Governor Amir Yaron told a news conference after the decision.
"The hasty use of the interest rate tool in an environment of such significant uncertainty, if things reverse, it will only increase volatility in the financial markets and it could require time or bigger tools to fix it. Therefore, for now we are waiting for the entrenchment of stability in the financial markets and only after that we can weigh using monetary tools moreover."
Yaron noted that Israel's risk premium remained high, even though the shekel has recovered 8% versus the dollar after sliding 6% at the outset of the war.
The central bank cut its forecasts for economic growth in 2023 and 2024 in view of the impact of the war, now seeing an expansion of 2% next year, down from 2.8% a month ago - given an expectation that the war will be contained near the Gaza border and continue into 2024.
The forecast estimates that the budgetary costs of the war - expenditures plus loss of income - are expected to total 10% of GDP.
WAR SPENDING
Central bank economists also trimmed their 2023 growth estimate to 2% from 2.3%, and expect an inflation rate of 2.4% in the coming year. Their staff estimate envisaged the key interest rate falling to range of 3.75% to 4.0% by the end of 2024.
Officials have previously cautioned that steep rate cuts at the moment would weaken the shekel and push up inflation.
In its statement, the central bank pointed to the conditions needed for it to provide a more supportive monetary policy.
"The interest rate path will be determined in accordance with developments in the war and the uncertainty derived from it," it said.
Israel's inflation rate eased to 3.7% in October from 3.8% in September to remain above an annual target range of 1%-3%. Yaron said that despite stable inflation, much still depended on the relative severity of the supply limitations and the decline in demand stemming from the war.
The central bank estimated state spending on the war of around 160 billion shekels ($43 billion) and Yaron urged fiscal discipline by cutting less essential spending.
Yaron this month accepted a second five-year term to begin in 2024. Earlier on Monday, the head of parliament's finance committee, Moshe Gafni, lashed out at Yaron and called him a "bad governor".
($1 = 3.7154 shekels)