Bank of Israel cuts growth prospects, holds rates, warns about Trump tariff effect
Central Bank head Amir Yaron says 17% US tariff on Israeli goods will reduce exports and moderate growth; bank also sees slower growth as Gaza war resumes
Sharon Wrobel is a tech reporter for The Times of Israel
The Bank of Israel anticipates slower growth for this year and the next, as it expects the resumption of war with Hamas in Gaza and the newly imposed US tariffs to take a toll on the country’s economy.
“Recent days have seen a considerable shock to the global economy, against the backdrop of the new tariff plan announced by the US administration and the expected effects of the program,” said Bank of Israel Governor Amir Yaron, at a press conference in Jerusalem. “The new tariff policy announced by the US administration is expected to moderate world trade, and reduce Israel’s exports.”
“Global growth and world trade forecasts were revised sharply downward… These developments are expected to have a notable impact on the Israeli economy,” Yaron cautioned.
His comments came hours before Prime Minister Benjamin Netanyahu was set to discuss the sweeping tariffs with US President Donald Trump at the White House. Under the new policy, Israeli goods face a 17 percent US tariff, leading to concerns in Jerusalem, as the US is the country’s closest ally and largest single trading partner.
Economists, trade experts, and capital market strategists in Israel believe that Netanyahu will seek to negotiate a reduction of the tax penalty to the lower baseline rate of 10%.
“It goes without saying that a reduction to 10% will help mitigate economic damage for Israel, but the main question is the scope of the total tariffs and the impact on global trade and the Israeli economy,” Yaron said. “It is important to understand that a significant part of the impact stems from a moderation in the volume of global trade, and not just from the specific tariff on Israel.”
The central bank said it now forecasts that the country’s economy will grow by 3.5% in 2025 and 4% in 2026. That projection was revised from a January growth estimate of 4% in 2025 and 4.5% in 2026, when the central bank assumed that the intense fighting with Hamas would abide in the first three months of the year.
The Organisation for Economic Co-operation and Development (OECD) said last week that it expects Israel’s economy to grow at a rate of 3.4% in 2025 and 5.5% in 2026. The Finance Ministry sees the economy expanding by 4.4% in 2025.
The central bank assessed that the “global import tariffs will moderate global demand for Israeli exports, such that GDP will grow at a lower-than-potential pace, and that it will remain below the trend that it showed in the past.”
“The impact of these measures on the Israeli economy will moderate GDP growth by about 0.5 percentage points in each of the years 2025 and 2026,” the central bank said. “Regarding exports, we estimate that goods exports to the US, which constitute about 13% of total goods and services exports, will be significantly affected by the tariffs imposed by the US administration.”
“These negative effects are expected to be somewhat offset by a gradual improvement we anticipate in the tourism industry and an increase in demand for defense exports,” it added.
Yaron noted that beyond the “high uncertainty deriving from the developments in the tariff area…there is also uncertainty regarding the development of the war.”
The central bank said that the trimmed growth forecasts assume that the “resumption of fighting in Gaza will not extend beyond the second quarter of 2025, and that during this period, there will be no serious restrictions on activity on the home front (in contrast with the situation at the beginning of the war).”
Alongside the revised growth forecasts, the central bank decided to hold the benchmark interest rate at 4.5% as “economic activity continues to recover moderately in view of geopolitical developments,” and “as uncertainty is at a very elevated level in view of the global developments…and the considerable volatility in financial markets.”
Israel’s economy grew by around 0.9% in 2024, down from 1.8% in 2023 and 6.3% in 2022, before the outbreak of the war with Hamas. The growth rate last year surpassed forecasts even as the war with the terror group and with the Iran-backed Hezbollah increased government spending on military and civilian needs and took a toll on the country’s exports and investments.
The Times of Israel Community.