Bank of Israel/ Wikipedia
The Monetary Committee of the Bank of Israel on Monday announced that it decided to leave the interest rate unchanged at 4.5%.
Despite geopolitical developments, economic activity is recovering at a moderate pace, explained the Bank of Israel. However, supply constraints in certain industries continue to impede the closing of the gap between actual GDP and its long-term trend.
The inflation rate in Israel remains stable at 3.4%. Tax changes, particularly the increase in VAT, along with continued supply constraints and excess demand, are expected to raise the inflation rate in the first half of the year, and inflation is expected to moderate to within the target range during the second half of the year.
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The Research Department of the Bank of Israel also forecasts that GDP is expected to grow by 0.6% in 2024 and 4% in 2025, slightly higher than the October forecast. The Department expects GDP to grow by 4.5% in 2026.
The labor market remains tight, with slight improvements in participation and employment rates, alongside a slight decrease in broad unemployment and moderate wage increases.
Israel’s risk premium declined significantly, as reflected in the 5-year CDS, the spread of dollar-denominated government bonds, and the yield on shekel bonds. The level is still high relative to the prewar period.
Since the last interest rate decision, the shekel has appreciated by approximately 0.5% against the US dollar. The shekel also appreciated by 2.4% against the euro, and by 1.9% in terms of the nominal effective exchange rate, explained the Bank of Israel.
In the housing market, the annual rate of increase in housing prices continued to rise, to 6.7%. Activity in the construction industry remains lower than the prewar period, mainly affected by manpower limitations that remain significant.
In view of the continuing war, the Bank of Israel’s Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.
The recovery in economic activity continues at a moderate pace, in view of geopolitical developments. The supply constraints in some industries continue to delay the narrowing of the gap between the actual level of GDP and its expected level according to the long-term trend. The inflation rate was stable, but above the upper bound of the target range.
Taxation changes, particularly the increase in VAT, alongside continued supply constraints combined with surplus demand, are expected to raise the pace of inflation in the first half of the year, following which inflation is expected to moderate to within the target range in the second half, added the Bank of Israel. The economy’s risk premium declined markedly, but remains higher than in the prewar period.
