The Bank of Israel kept its interest rate unchanged at 4.5% on Wednesday.
The bank cited a number of factors in its decision, including geopolitical uncertainty, which the bank said has increased in recent months, and fiscal uncertainty.
These uncertainties are reflected, among other indicators, in the large gap between yields on Israel’s government bonds and US bonds, the bank said.
It also cited inflation as part of its decision to hold the interest rate steady, saying inflation has been increasing in recent months and is slightly above the target range.
The predictions for inflation are that the yearly inflation rate will remain above the target range, and inflation will continue to increase in early 2025, said the bank. It will moderate to around the top of the range in mid-2025, it added.
Uncertainty surrounding Israel’s 2025 budget and adjustments needed to shrink the country’s deficit are contributing to increased risk premiums and may make bringing inflation back within the target range more difficult, the bank said.
2025 predictions
Some geopolitical developments, and other impacts of the war on Israel’s economy, could cause inflation to continue to rise and increase its speed, the bank warned.
The shekel has remained stable against the dollar and weakened against the euro since the last credit decision, the bank added as another reason it held the interest rate steady.
The bank also touched on increasing prices in the housing market, caused by restricted demand as the war continues to impact the construction industry. The war has also continued to limit the supply of labor, it added.
Israel’s deficit is still expected to be at 6.6% of the gross domestic product at the end of 2024 if there are no increased security expenditures, the bank said.
As the Israel-Hamas war continues, the bank’s monetary policy continues to be focused on stabilizing the markets and reducing uncertainty, alongside stabilizing prices and supporting economic activity, the bank explained.
Globally, economic activity is expanding and inflation is slowing, the bank said, mentioning expected rate cuts from the US Federal Reserve and European Central Bank.
The Bank of Israel interest rate is the center of the range between the rate at which the bank lends and the rate at which the bank borrows money from Israel’s commercial banks, and this rate impacts those that banks then offer to customers.
When the BoI interest rate increases, the prime rate also increases. Many other interest rates are determined by the rate or directly tied to it.