Israel: Central Bank leaves rates unchanged in February
Latest bank decision: At its meeting on 24 February 2025, the Central Bank decided to leave the interest rate unchanged at 4.50%.
Monetary policy drivers: The Central Bank likely judged it was premature to cut rates given that the labor market is tight and headline plus core inflation are above the upper bound of the Bank’s 1.0–3.0% target range. On the flipside, hiking rates was not warranted either, as market inflation expectations for the coming year were within target, and the Bank still expects inflation to fall back within its 1.0–3.0% target range in the second half of 2025—as our panelists also predict. In addition, fiscal policy is set to become more restrictive this year, and the economy continues to be somewhat hampered by the war.
Policy outlook: The Central Bank provided no explicit forward guidance on the future direction of interest rates. All our panelists expect rate cuts in 2025, with most seeing 50 basis points of cuts. Monetary easing is likely to begin in Q2 or Q3, as inflation starts to trend down again following the VAT-induced jump observed in January 2025.
Panelist insight: On the outlook, Goldman Sachs’ analysts said:
“The Bank of Israel has maintained a relatively hawkish reaction function since the start of the Israel-Hamas conflict and has kept its base rate on hold during the past year, citing geopolitical uncertainty and, more recently, above-target inflation. […] So far, we do not think any developments have materially changed the BoI’s base case (of policy rates remaining on hold through the first half of this year) and we continue to expect the next cut in Q3.”