No Surprises: Bank of Israel Keeps Interest Rate at 4.5%
The central bank has decided to leave the interest rate unchanged at 4.5%, in line with analyst expectations and against the backdrop of rising consumer prices, which have pushed inflation beyond the upper limit of the target range
The Bank of Israel emphasized that future rate decisions will depend on "inflation converging to its target, continued stability in financial markets, economic activity, and fiscal policy."
This expected decision follows a 0.6% increase in the Consumer Price Index (CPI) for January, which brought annual inflation to 3.8%—above the upper target range. Forecasts indicate that inflation is likely to return within the target range only in the second half of the year. However, inflation expectations for the coming year, based on various sources, remain within the target range, and longer-term expectations continue to align with it.
The central bank also warned of several risks that could accelerate inflation or prevent it from converging to target, including "geopolitical developments and their impact on economic activity, persistent supply constraints, shekel volatility, and fiscal trends."
Economic Growth Surpasses Expectations
Another key data point highlighted by the Bank of Israel is GDP growth, which expanded by 1% in 2024, slightly surpassing the research department’s early 2025 estimates. According to recent data, the gap between actual GDP and its expected level based on long-term trends stood at 4.4%, while the business sector output gap reached 6%.
In Q4 2024, GDP growth was driven by a surge in domestic demand: Private consumption rose by 9.5%, Public consumption increased by 11.5%, Fixed asset investment jumped by 14%
This was partially offset by a 4.4% decline in service exports (excluding startups). The sharp increase in domestic demand was met primarily by a 12.5% rise in imports (excluding defense-related imports, energy, and diamonds), reflecting excess demand amid supply constraints.
Additionally, Q3 2024 GDP data was revised upward to 5.3% growth.
Strong Labor Market Supports Stable Rates
A key factor allowing the central bank to hold rates steady is the tight labor market: The broad unemployment rate dropped to 2.8% in January, below its pre-war level, The share of reservists temporarily absent from work declined to 0.6%, The job vacancy rate remained stable at 4.4%, Employment levels returned to their pre-war state, while the labor force participation rate for those aged 15+ continued to rise and is now just slightly below pre-war levels, Nominal wage growth accelerated in December 2024, with wages rising 6.8% since September 2023 (or 5.4% on an annualized basis). While real wages also increased, they remain below the long-term trend.
Signs of a Moderate Recovery
The Bank of Israel noted that economic activity indicators point to a continued but moderate recovery: Nominal credit card spending edged lower in the most recent data but remains near its long-term trend, The business trends survey composite index continued to rise in January, approaching pre-war levels—particularly in northern and southern regions, which had seen the steepest declines, The composite index for January increased by 0.6%, while the November and December readings were both revised upward by 0.2%, Venture capital funding in the tech sector for January and February was on par with 2019 levels and pre-war figures.
However, consumer confidence continued to decline in 2024, remaining at low levels. Additionally, the trade deficit in goods widened in January, as imports surged while exports held steady.
