Bank of Israel leaves borrowing costs unchanged at 4.5% after inflation rose to 3.8% last month

The Bank of Israel opts to leave borrowing costs unchanged at 4.5% after inflation accelerated last month fueled by war-related costs and government spending on defense needs.

“The recovery in economic activity continues at a moderate pace, in view of geopolitical developments… the annual inflation rate increased, partly due to tax increases, and is above the upper bound of the target range,” the central bank says in a statement. “In view of the continuing war, the monetary committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity.”

Annual inflation accelerated to 3.8% in January from 3.2% in December after a series of government tax hikes came into effect last month to help fund war expenditure, according to data by the Central Bureau of Statistics. The government’s target range for inflation is between 1% and 3%.

Ahead of the interest rate decision, economists were in consensus that the central bank would not rush to lower the base lending rate, but projected that borrowing costs for mortgage and loan holders could start coming down over the course of the year with the first decrease expected as early as May.

The central bank last lowered interest rates in January 2024, which marked the first cut in almost four years, in an effort to support households and businesses as the economy got battered by the war with the Hamas terror group and as the inflation environment was easing. Since then, borrowing costs have remained steady.