In a remarkable display of economic confidence, Israel’s central bank governor, Amir Yaron, signaled a potential easing of monetary policy, projecting one or two interest rate cuts in the latter half of 2025. Speaking to US financial news network CNBC at the World Economic Forum in Davos, Yaron highlighted expectations that inflation, which has been running above the target range of 1% to 3%, will moderate significantly in the coming months.
“We anticipate inflation will rise slightly in the first half of the year, driven by new taxes and the ongoing recovery, where demand is outpacing supply constraints,” Yaron explained. “However, as the year progresses, we foresee inflation returning to our target range, making one or two rate cuts feasible.” This optimism reflects the central bank’s strategic vision to bolster economic activity while maintaining price stability.
Yaron’s forecasts extend beyond monetary policy, projecting robust GDP growth of 4% in 2025 and an even more impressive 4.5% in 2026. These figures stand in stark contrast to the modest 0.6% growth anticipated for 2024, a year burdened by the economic repercussions of recent military escalations.
Bank of #Israel Monetary Committee kept the interest rate unch at 4.5% in all its decisions in 2H2024 and is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity, chart BoI https://t.co/mLq9I2OUHJ pic.twitter.com/baLlXPt1aR
— ACEMAXX ANALYTICS (@acemaxx) January 22, 2025
Turning Point for Regional Stability
The ceasefire agreement brokered by Qatar, Egypt, and the United States has injected cautious optimism into the region. Reflecting on the events of October 7, 2023, Yaron described the tragic day as a potential inflection point.
“I hope the ceasefire marks a turning point,” he said. “If it holds, it could pave the way for regional cooperation, rehabilitation, and sustainable security, fostering economic growth not just for Israel but for the entire region.”
Bank of Israel governor sees up to two rate cuts in the second half of 2025 https://t.co/vYHmyNDqnD
— CNBC International (@CNBCi) January 21, 2025
The initial 42-day phase of the ceasefire, which includes the release of 33 Israeli captives and over 1,700 Palestinian prisoners, has been lauded as a critical step toward de-escalation. Additionally, humanitarian aid flows have been ramped up, with essential supplies, including fuel, being delivered to the embattled Gaza Strip.
Credit Agencies Weigh In
Global ratings agencies have taken note of these developments. Moody’s described the ceasefire as a factor that “reduces downside risks to Israel’s economy and finances,” while Fitch highlighted that a lasting truce could ease credit risks, despite Israel’s fiscal position remaining weaker than pre-war levels.
Fitch’s recent report emphasized the importance of stability, stating, “A durable cessation of the war in Gaza would reduce risks captured by the Negative Outlook on Israel’s ‘A’ sovereign rating.”
Credit rating agency Standard & Poor’s warns that the recent ceasefire agreement between Israel and the Hamas terror group could face “implementation risks.”
— Netanel Worthy - נתנאל וורתי (@NetanelWorthy) January 21, 2025
S&P joins fellow credit rating agencies Moody’s and Fitch in assessing that a durable ceasefire and end of the war in…
Fiscal Challenges Amid Optimism
Despite the optimistic outlook, Israel faces significant fiscal challenges. The finance ministry revealed that military expenditures in 2024 reached a staggering 100 billion shekels ($28 billion), driving government borrowing and raising the debt-to-GDP ratio from 61.3% in 2023 to 69% in 2024.
These expenditures, coupled with a September downgrade of Israel’s credit rating by Moody’s from “A2” to “Baa1,” underscore the financial toll of the conflict with Hezbollah. However, the subsequent November ceasefire agreement has mitigated some of these concerns, allowing policymakers to focus on long-term economic recovery.
The establishment of sustainable arrangements in the Middle East will boost growth not only in Israel but in the region at large, Bank of Israel Governor Amir Yaron said https://t.co/zSXCsDTtOP
— Bloomberg Economics (@economics) January 21, 2025
Path to Resilience and Growth
Yaron’s remarks underscore a broader narrative of resilience. By 2025, the central bank governor envisions an Israel that has turned economic and geopolitical challenges into opportunities for sustainable growth.
“With the right measures and a commitment to peace, Israel can emerge stronger,” Yaron concluded. “The region’s potential for collaboration and economic integration is immense. Now is the time to seize it.”
As Israel navigates the path to recovery, the world watches closely, hopeful that the convergence of economic pragmatism and regional stability will usher in a new era of prosperity and peace.
