Bank of Israel holds rate at 4.5%, maintains hawkish stance

ISRAEL - In Brief 24 Feb 2025 by Sani Ziv

---

The central bank of Israel kept its benchmark interest rate unchanged at 4.5% on February 24th, citing elevated inflation (3.8%) and a tight labor market. While the decision was widely anticipated, the central bank adopted a hawkish stance, emphasizing persistent inflation risks driven by geopolitical developments, shekel volatility, and fiscal uncertainty. It also emphasized that annual inflation (3.8%) remains well above its 3% upper target, with sticky non-tradable inflation (4.1%) and rising housing costs (+7.3%) further justifying its cautious approach. Inflation and interest rate adjustments in Israel Source: Interest rate data – Bank of Israel; Inflation data – Central Bureau of Statistics.Forecast: Macro Analytics Ltd. We do not see monetary easing before mid-year, with May 27th as the earliest possible date, though a first cut may not come before July 11 or August 20, when inflation is expected to decline below 3.0%. We see six key factors influencing the timing of the first rate cut: Impact of VAT and regulated price adjustments: The recent increase in Value Added Tax (VAT) and changes in regulated prices are expected to elevate inflation in the first half of 2025. The BoI will closely monitor how these adjustments influence overall price levels and inflation dynamics. Demand-supply balance and labor market dynamics: Supply constraints, particularly in sectors like construction and agriculture, have been exacerbated by the war, leading to workforce shortages. As these constraints gradually ease and the labor market returns to more efficient functioning, we anticipate downward pressure on prices.Inflation expectations: Inflation expectations have recently decl...