Bank of Israel Maintains 4.5% Interest Rate: Monetary Policy Unchanged

The Monetary Committee of the Bank of Israel on Monday announced that it has decided to leave the interest rate unchanged at 4.5 percent.

Amid the ongoing war, the Monetary Committee said it remains steadfast in its mission to stabilize markets and restore confidence, navigating a landscape of uncertainty while safeguarding price stability and economic resilience. Every decision on the interest rate path will be meticulously shaped by the trajectory of inflation, the endurance of financial markets, the pulse of economic activity, and the course of fiscal policy—ensuring a measured and strategic response to an evolving crisis, it pledged.

In explaining its decision on the interest rate, the Bank said that economic activity continues to recover moderately in view of geopolitical developments. In the fourth quarter of 2024, the growth rate moderated, reflecting a marked increase in most domestic uses, which, combined with supply constraints, was largely fulfilled through increased imports.

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At the same time, previous GDP data were revised, such that GDP grew by 1 percent in 2024.

The annual inflation rate increased, to 3.8 percent—above the upper bound of the target range—partly due to tax increases. Inflation is expected to enter into the target range in the second half of the year.

The labor market remains tight, as indicated by unemployment, job vacancy, employment, participation, and wage data.

Since the previous interest rate decision, the shekel has appreciated by 1.9 percent against the US dollar. The shekel also appreciated by 1.3 percent against the euro, and by 1 percent in terms of the nominal effective exchange rate.

Israel’s risk premium, as measured by the 5-year CDS price and by the spreads on dollar-denominated government bonds, continued to decline, but remained higher than in the prewar period.

Home prices rose by 7.3 percent in 2024. Activity in the construction industry continues to be influenced by labor shortages, but the difference between the number of people currently employed in the construction industry and their number prior to the war has narrowed.

The Bank of Israel also pointed out that globally, economic activity continued to expand in the fourth quarter, though at a more moderate pace. The global composite Purchasing Managers Index for January declined, but continued to indicate moderate expansion of economic activity. The global services sector showed a decline, while the manufacturing sector continued to show an increase. World trade continued to expand, increasing by 0.4 percent in November, and by 3.6 percent compared to the same period in the previous year.

In addition, fourth quarter growth in the United States was 2.3 percent in annual terms, slightly lower than expected. Private consumption remained strong, and is the main component contributing to growth. The labor market remained stable. In Europe, the pace of economic expansion moderated, with GDP growing by 0.4 percent in annual terms in the fourth quarter.