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Israel counts cost of war as growth forecast slashed

The country’s economy will take a major hit in the fourth quarter of the year, according to its central bank

Israel’s central bank revised down its economic growth forecast on Monday amid risks arising from the escalation of the Gaza conflict.

According to revised projections, gross domestic product (GDP) will expand by 2.3% this year and by 2.8% in 2024, down from its previous July estimate of 3% for both years as the war weighs on the country’s growth.

The outlook assumes that the conflict will deal the main blow to the Israeli economy in the fourth quarter of the year. Although the regulator left interest rates unchanged as policymakers focused on propping up the shekel after it slumped to an 11-year low, it warned that a wider war would affect its policy further. The central bank held its benchmark interest rate at 4.75% – the highest level since late 2006.

“The interest rate path, and the use of additional monetary policy tools, will be determined in accordance with this purpose and with developments in the war, as well as with data on economic activity and the inflation dynamics, in order to continue supporting the markets’ stability and achieving the policy objectives and the needs of the economy,” the central bank said.

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Israeli currency drops to eight-year low

The Israeli shekel has dropped every day since the conflict between Israel’s security forces and Palestinian armed groups in Gaza flared up on October 7.

Along with the shekel’s depreciation, which represents a major inflationary risk, the regulator warned of a huge disruption to the economy that would crimp consumer demand for goods and services. Demand and supply are both expected to remain constrained due to labor shortages following mobilization, and the destruction of infrastructure.

Counting the costs of war, Israel also revised upwards its projections for its budget deficit, which it expects to reach 3.5% of GDP this year as the government is planning a massive wartime stimulus program.

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