The Bank of Israel kept its benchmark interest rate unchanged at 4.50% on 6 January 2025, as annual inflation remained above the government's target range and the war continued to weigh on the economic outlook.
The rate has stood at 4.50% since a cut in January 2024. The Monetary Committee voted unanimously to hold the rate at each of its decisions in the second half of 2024.
INFLATION ABOVE TARGET
Annual inflation was 3.4% in the 12 months to November 2024, up from 2.9% in mid-year and above the upper bound of the 1%–3% target range, where it has remained for more than six consecutive months. The Committee expects inflation to rise further in the first half of 2025, driven by tax increases including a rise in VAT, continued supply constraints and excess demand, before moderating to within the target range in the second half of the year.
Since the outbreak of the war, the Committee has said its policy is focused on stabilising the markets and reducing uncertainty, alongside price stability and supporting economic activity, with the interest rate path determined by the convergence of inflation to target, financial market stability, economic activity and fiscal policy.
WEAK GROWTH IN 2024
The Bank of Israel Research Department's January 2025 staff forecast estimated that gross domestic product grew by only 0.6% in 2024, and projected growth of 4.0% in 2025 and 4.5% in 2026. The forecast assumed that the direct economic effect of the war would continue at a moderate intensity until the end of the first quarter of 2025. Inflation is forecast to be 2.6% at the end of 2025 and 2.3% in 2026.
GDP expanded at an annualised rate of 3.8% in the third quarter of 2024, after 0.1% in the second quarter, but activity remained below its long-term trend, held back by labour shortages linked to the war.