The Bank of Israel left the benchmark interest rate unchanged at 4.5% on Monday, citing a moderate recovery in the economy.
In light of the Israel-Hamas War, the central bank said it was focused on stabilizing the economy, reducing uncertainty, maintaining price stability, and supporting economic activity.
“The interest rate will be set in accordance with inflation converging to its target, continued stability in the financial markets, economic activity, and fiscal policy,” it said.
Inflation increased, and the yearly inflation rate was 3.8%, which was over the upper limit of the target rate, the central bank reported. This was in line with expectations and is partially due to tax increases, it said.
The report said that inflation is expected to converge to target rates in the second half of 2025.
The growth rate moderated in the fourth quarter of 2024, according to an initial estimate, and stood at 2.5%, it said.
The quarterly increase in production in the fourth quarter reflected a significant increase in local uses, including private consumption, public consumption, and investment in fixed assets, the central bank said.
Updated estimates showed that GDP in 2024 grew by 1% – more than the bank’s previous estimates.
Economic activity continued to recover gradually, the report said.
The cumulative deficit over the last 12 months stood at 5.8% of GDP in January, a decrease from 6.9% in December, the bank said, adding that this was due to a sharp increase in government income from taxes.
Strength of the shekel
The shekel strengthened against the euro and dollar since the last interest-rate decision, the bank said.
Israel’s risk premium remained high when compared with the period before the war but continued to decrease.
While the number of those employed in construction approached prewar levels, the sector was still impacted by workforce shortages, the bank said, adding that the yearly price increase for apartment prices was 7.3%.
The central bank’s decision was in line with the predictions of 13 economists polled by Reuters, who all said the rate would remain at 4.5%.
Some of the analysts polled said a rate cut would be possible in the coming months should price pressures ease.The rate has stayed at 4.5% since January 2024, when it was cut from 4.75%.
The Freelancers Forum of the Histadrut labor federation had called on the bank on Sunday to lower the rate, citing the difficulties of higher rates for small business owners and freelancers.
“The high interest rate is the fault of the Finance Ministry and not of the Bank of Israel,” said the forum’s chairman, Rami Beja. “The Finance Ministry and the finance minister have not acted in the last year to restore the economy.
We must lower the interest rate to prevent further destruction of businesses and the self-employed.”
Reuters contributed to this report.
