Bank of Israel keeps interest rate at 4.5%, citing ‘continuing geopolitical uncertainty’

The Bank of Israel opts to leave borrowing costs unchanged at 4.5 percent, as heightened geopolitical uncertainty amid the ongoing war with the Hamas terror group and fighting with the Iran-backed Hezbollah continue to take a toll on the economy.

“The continuing geopolitical uncertainty… is delaying the economy’s return to the level of activity that characterized it prior to the war,” the central bank says in a statement. “The most recent indicators of economic activity point to a mixed picture regarding the level of economic activity in the fourth quarter, with a slight tendency toward weakening.”

“In the financial markets, Israel’s risk premium declined, although it remains high,” the Bank of Israel adds.

Ahead of the decision, economists were in consensus that the base lending rate would remain steady but projected that borrowing costs for mortgage and loan holders could start to come down next year to a level of 4% by the end of 2025, following similar moves in the US and Europe.

In January this year, the Bank of Israel cut interest rates for the first time in almost four years by 25 basis points from 4.75% to 4.5% to support households and businesses as the economy was getting battered by the war with Hamas and with the inflation environment easing. Since then, borrowing costs have not changed, amid heightened inflationary pressure, persistent regional tensions, and higher fiscal spending as defense costs rise.

In September, Israel’s annual inflation rate eased to 3.5% from 3.6% in August after accelerating from 3.2% in July and 2.9% in June. In October it remained at 3.5%. However, it is still above the government’s target range of 1% to 3%.

“The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy,” the central bank states.