In a move anticipated by economists and financial experts, the Bank of Israel Monetary Committee has announced its decision to maintain the benchmark interest rate at 4.5%—marking the eighth successive time the rate has been held steady. This decision comes nearly a year after the January 2024 cut from 4.75%, reflecting the central bank’s cautious approach to navigating a volatile economic landscape shaped by ongoing geopolitical tensions and domestic uncertainties.
Economic Growth Projections Revised Upward
Alongside its announcement, the Bank of Israel’s research department unveiled an updated economic forecast that brings a glimmer of optimism to an otherwise challenging period. The revised projections indicate modest GDP growth of 0.6% for 2024, reflecting the immediate economic strain of the ongoing conflict. However, brighter days may lie ahead, with GDP growth forecasted to accelerate to 4% in 2025—an upward adjustment from the October 2024 projection of 3.8%. The upward trend is expected to continue, with growth reaching a robust 4.5% in 2026.
Israel’s central bank left interest rates unchanged as it anticipates more inflationary pressure stemming from the country’s multi-front war against Iran-backed militias https://t.co/2tbnVZm4wv
— Bloomberg Middle East (@middleeast) January 6, 2025
This improved outlook signals confidence in Israel’s economic resilience, underpinned by the expectation of post-war recovery and stabilization.
Interest Rate Outlook: Gradual Decline Ahead
The Bank of Israel has also hinted at the possibility of a gradual easing of monetary policy in the coming year. Analysts predict that the interest rate could drop to 4.25% or even 4% by the end of 2025, signaling a pivot toward stimulating economic activity as inflationary pressures moderate.
Steering Through Turbulence
The Monetary Committee attributed its decision to the complexities of managing an economy under the shadow of conflict. "Amid the ongoing war, our policy remains laser-focused on stabilizing markets and reducing uncertainty," the Bank of Israel stated. This approach aims to balance competing priorities: ensuring price stability, maintaining economic activity, and fostering confidence in the financial system, all while navigating the challenges posed by fiscal constraints.
#Israel's set to hold interest rates again on Monday, as the central bank anticipates more #inflation pressures from the country's conflicts.
— Paul Wallace (@PaulWallace123) January 6, 2025
One plus for the central bank: the shekel & ILS bonds have rallied since the Hezbollah truce.https://t.co/8Ti2Xq0CQc @GalitAltstein pic.twitter.com/mt9vUFDGrh
Inflation: Pressures Expected to Ease in Late 2025
Inflation has remained a central concern. The current inflation rate stands at 3.4%, slightly above the Bank of Israel’s target range. The central bank acknowledged that upcoming tax changes—particularly the VAT hike—along with persistent supply constraints and heightened demand, are likely to exert upward pressure on prices in the short term.
However, relief may be on the horizon. "Inflation is expected to rise during the first half of the year but moderate to within the target range in the second half of 2025," the central bank reassured.
Bank of Israel holds rates again, with inflation still above target.https://t.co/MoTnLMKpwN
— The Jerusalem Post (@Jerusalem_Post) January 6, 2025
A Balancing Act in Uncertain Times
This latest decision underscores the delicate balancing act facing Israel’s monetary authorities. The central bank is not only managing the immediate economic fallout from the ongoing war but also laying the groundwork for a post-conflict recovery.
The Bank of Israel’s strategy reflects a dual commitment: on one hand, addressing short-term pressures like inflation and market volatility, and on the other, fostering conditions for long-term economic growth.
As Israel navigates this complex economic and geopolitical landscape, the Bank of Israel remains steadfast in its mission to support stability and resilience. With GDP forecasts improving and inflation projected to moderate, the central bank’s cautious yet optimistic approach could prove instrumental in guiding the nation through these turbulent times.
