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The Bank of Israel on Monday decided to leave the interest rate unchanged at 4.5 percent. The decision was made as Israel’s Iron Swords War against the Hamas terrorist organization continues.
In making the decision to leave the rate unchanged, the Bank’s Monetary Committee made a statement that it does not expect further damage to Israel’s economy due to the war. Had lowered the rate it would have meant that the Bank thought the economy was in need of stimulation. However, by not raising the rate the Bank made an inherent statement that Israel’s economy is not strong enough at this time for such a move, nor has the problem of global inflation sufficiently subsided.
The October 7 terrorist massacre and subsequent war in Gaza devastated Israel’s economy in the fourth quarter of 2023. The Bank of Israel reported that in that quarter the country’s GDP contracted by 5.6 percent, compared with the third quarter. Over the year as a whole, GDP grew by 2 percent.
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The Bank of Israel’s Research Department’s assessment is that GDP will grow in Israel by 2 percent in 2024 and by 5 percent in 2025.
“In view of the war, the forecast is characterized by a high level of uncertainty,” said the Bank.
Beyond the security effects of the war, it explained, Israel is having “significant economic consequences,” both on real activity and on the financial markets. Indicators of economic activity continue to point to a “gradual improvement, following a significant contraction in business activity with the outbreak of the war.” Geopolitical uncertainty, however, has increased and is reflected in the economy’s relatively high risk premium.
“The Committee assesses that at this time there are several main risks for a possible acceleration of inflation,” commented Governor of the Bank of Israel Amir Yaron. “The development of the war and its impact on economic activity, depreciation of the shekel, the limitations on activity in the construction industry, fiscal developments, and global oil prices. Recall that high inflation creates increasing difficulty for households and businesses and adversely impacts weaker groups first and foremost.”
“The Israeli economy has strong economic foundations that can support a continued process of recovery, and assist in the growth of the economy even in the difficult period through which the State of Israel is going,” added Bank of Israel Governor Yaron. “The Bank of Israel will continue to assist the Israeli economy to get through the various challenges that are still expected for us.”
