Bank of Israel holds interest rate at 4.5%, citing inflation concerns and geopolitical instability

Central bank's updated forecasts for 2025 project economic improvement and a potential rate reduction of 0.25–0.5%; Governor Yaron warns against premature cuts

The Bank of Israel announced Monday that it is keeping the benchmark interest rate unchanged at 4.5% for the eighth consecutive time, equivalent to a 6% prime rate.
Despite global trends of rate cuts, the central bank indicated that inflation and economic uncertainties preclude any immediate reductions.
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בנק ישראל
בנק ישראל
Bank of Israel
(Photo: Gettyimages)
Updated projections from the Bank of Israel's research department suggest the interest rate could drop to 4%–4.25% by the fourth quarter of 2025. The forecast also revised upward Israel’s GDP growth for 2025 to 4% from 3.8% and private consumption to 7.5% from 7%. The fiscal deficit is expected to narrow slightly to 4.7% in 2025, down from a previous estimate of 4.9%.
Inflation for 2024 is now projected at 3.4%, an improvement from earlier estimates of 3.8%, but January’s Consumer Price Index is expected to spike due to a 1% VAT hike, increases in electricity (3.5%), water (2%), property taxes (up to 5.29%) and prices of essential goods by 3%–15%. Inflation is forecast to exceed 4% in early 2024 before declining later in the year.
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Speaking at a press conference, Bank of Israel Governor Prof. Amir Yaron said geopolitical instability, particularly in relation to Hezbollah and Iran, necessitates caution in economic forecasts. He emphasized that while the war’s effects on the economy could extend into the first quarter of 2025, the cease-fire in the north and the approval of a tax package have improved investor confidence.
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אמיר ירון
אמיר ירון
Bank of Israel Governor Prof. Amir Yaron
(Photo: Shalev Shalom)
Yaron defended the decision to hold rates, warning that reducing them amid inflationary pressures would be counterproductive. He also criticized the government for insufficient measures to offset defense spending and suggested closing ministries to reduce the deficit. Yaron highlighted the economic burden of ultra-Orthodox non-participation in the workforce, estimating a 0.5% GDP loss, or NIS 10 billion ($2.8 billion) annually.
Despite holding rates steady for now, analysts predict the central bank could implement two rate cuts during 2025, likely reducing the rate to 4% by year’s end. A potential first cut could occur in the spring, contingent on easing inflation and approval of the 2025 budget.
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