Bank of Israel leaves interest rate unchanged, trims growth forecast due to war

The Bank of Israel decides to leave interest rates steady at 4.5 percent, citing “high domestic and global uncertainty,” as it lowers the economy’s growth forecast for this year due to the impact of fighting with Iran.

“Economic activity continues to recover at a moderate pace, against the background of high domestic and global uncertainty,” the central bank says in a statement. “Following Operation Rising Lion (the military operation against Iran), Israel’s risk premium declined significantly, but it remains higher than it was before the October 7, 2023, massacre.”

The central bank says it now forecasts that the economy will grow by 3.3% in 2025, down from a previous growth estimate of 3.5% in 2025. But it raises the growth estimate for 2026 from 4% to 4.6%.

Ahead of the interest rate decision, the majority of economists were in consensus that the central bank would take a wait-and-see approach about consumer prices continuing to moderate before rushing to lower the base lending rate. Only one economist forecasted a reduction to 4.25% in the borrowing rate.

Israeli inflation in May retreated to 3.1%, down from 3.6% in April and 3.3% in March. However, it is still above the government’s annual target range of between 1% and 3%.

“There are several risks for a possible acceleration of inflation or for it not converging to the target range: geopolitical developments and their impact on economic activity, an increase in demand alongside supply constraints, and worsening global terms of trade,” the central bank says.

The central bank last lowered interest rates in January 2024, the first cut in almost four years, to support households and businesses as the economy was getting battered by the war with Hamas in Gaza.