Israel's Central Bank Holds Interest Rate Steady at 4.5% Amid Moderate Economic Recovery
The Monetary Policy Committee of the Bank of Israel decided to keep the interest rate at 4.5% on January 6, 2025. This decision was made in light of geopolitical developments and a moderate pace of economic recovery. Supply constraints across various sectors continue, slowing the reduction of the gap between actual GDP and its long-term expected level.
The inflation rate remains at 3.4%. Tax changes, particularly the VAT increase, ongoing supply constraints, and excessive demand are expected to be factors that will increase the inflation rate in the first half of the year. However, inflation is anticipated to follow a moderate trajectory within the target range in the second half of the year.
The Research Department forecasts GDP growth of 0.6% for 2024 and 4.0% for 2025, indicating a slight increase compared to October’s predictions. The Department also predicts GDP growth of 4.5% for 2026. The labor market is showing slight improvements in participation and employment rates, accompanied by a moderate decline in broad unemployment and modest wage increases.
The country's risk premium has significantly decreased, as observed in the 5-year CDS, the spread of dollar-denominated government bonds, and the yields on shekel-denominated bonds. However, it still remains high compared to pre-war levels.
Since the last interest rate decision, the shekel has appreciated by approximately 0.5% against the US dollar, 2.4% against the euro, and 1.9% based on the nominal effective exchange rate.
In the housing market, the annual rate of increase in housing prices has reached 6.7%, continuing to rise. However, construction sector activity remains at lower levels compared to the pre-war period, primarily due to significant labor constraints.
The ongoing policy of the Monetary Policy Committee in the current wartime environment focuses on stabilizing markets and reducing uncertainty, while also ensuring price stability and supporting economic activity. The path of interest rates will be determined based on the convergence of inflation to its target, the maintenance of stability in financial markets, economic activity, and fiscal policy. The next interest rate decision will be announced on Monday, February 24, 2025.
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