Central Bank leaves rates unchanged in October

Latest bank decision: At its meeting on 9 October, 2024, the Central Bank decided to leave the interest rate unchanged at 4.50%.

Monetary policy drivers: The Central Bank judged that it was premature to cut rates, given that headline and core inflation have increased recently due to supply constraints, and are now both above the upper bound of the Bank’s 1.0-3.0% target range. Moreover, one-year inflation expectations are around the upper bound of the target range, and the labor market is tight. On the flipside, hiking rates was not warranted either, as the latest data shows that the economy continues to be hampered by the war.

Policy outlook: There was no explicit forward guidance in the Central Bank’s press release, with future inflation, exchange rate movements and the developments of the war likely to play a key role in determining monetary policy ahead. Almost all panelists see rates on hold for the remainder of this year given persistent price pressures, before rate cuts ensue in 2025.

Panelist insight: On the outlook, Goldman Sachs’ analysts said: “we expect the BoI's cutting cycle to resume in Q1, although risks are clearly skewed towards a later cutting cycle. We do not expect the BoI to place a large weight on the weakness of activity data, as that weakness is driven primarily by supply constraints, particularly in the construction industry, while household consumption has largely recovered from the economic shock following October 7. Instead, the next cut will in our view be prompted by the external interest rate environment, particularly further Fed cuts.”

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