Bank of Israel leaves interest rate at 4.5%, amid wartime uncertainty

The Bank of Israel opts to leave borrowing costs unchanged for a fifth straight time, citing heightened geopolitical and fiscal uncertainty amid the ongoing war with the Hamas terror group that has been raging for more than 10 months.

“Since the outbreak of the war, and in recent months in particular, geopolitical uncertainty and its economic ramifications have increased,” the central bank says in a statement. “The uncertainty surrounding the state budget for 2025, and the implementation of adjustments required to reduce the deficit on an ongoing basis, contributes to an increase in the risk premium and is liable to weigh on the return of inflation to its target.”

The central bank decides to hold interest rates at 4.5% in line with forecasts by most economists. Ahead of the decision, economists were split not about whether policymakers would make a change to the interest rate level, but rather over the timing of the move, with some expecting either only one rate reduction at the very end of the year or none amid uncertainty over the extent of the war and the risk of an escalation of the fighting to an all-out-war with Hezbollah and Iran. In the US, meanwhile, expectations are increasing for multiple interest rate cuts by the end of the year, and the European Central Bank is also expected to lower borrowing costs further.

In January, the Bank of Israel cut the base lending rate 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, inflation has been on an upward trend. In July, Israel’s annual inflation rate accelerated above the 1-3% target range to 3.2%, from 2.9% a month earlier.