Bank of Israel Maintains Interest Rate at 4.5% Amid Rising Inflation and Economic Uncertainty

The Bank of Israel announced today it is leaving the benchmark interest rate unchanged at 4.5%, in line with market expectations. The decision comes after a week packed with critical economic data, including July’s Consumer Price Index (CPI) and second-quarter GDP figures, both of which painted a mixed picture of the Israeli economy.

Despite an annual 3.5% contraction in GDP and a 6% decline in business sector output, the central bank opted for caution, citing ongoing inflationary pressures, a tight labor market, and elevated geopolitical uncertainty.

Inflation Still Above Target, Growth Weakens

While annual inflation has been gradually declining, it still slightly exceeds the Bank of Israel’s target range. The central bank acknowledged that a prolonged contraction in economic activity, especially in private consumption, is concerning—but not enough to warrant a rate cut at this stage.

“The Bank prefers to maintain a cautious monetary stance,” the Monetary Committee said in its statement, “given the complex macroeconomic backdrop and uncertainty around the fiscal and geopolitical outlook.”

Economists: Rate Cut Likely Later This Year

Nira Shamir, Chief Economist at Discount Bank, supported the decision, noting that inflation, high wages, and a tight labor market still justify restraint.

“We estimate that the Bank of Israel will wait until the end of the year to begin cutting rates, once there’s more clarity on the geopolitical and fiscal front,” she said.

However, criticism from within the business sector was swift. Yossi Alkobi, President of the Crafts and Industry Association, condemned the decision, warning it could stifle small business growth and investment.

“The small business sector has been waiting 14 months for rate relief. Even a modest 0.25% cut would save NIS 450 million annually in financing costs,” he said.
“Inflation is falling, and global monetary easing is underway—this is the time to support growth and reduce the real interest burden.”

Alkobi also urged commercial banks to narrow the gap between borrowing and saving rates, calling on them to “lend a shoulder” during this economically challenging period.

What’s Next: Key Dates That Could Shift Policy

Two more interest rate decisions remain on the Bank of Israel’s calendar for 2025:

• September 29

• November 24

Yaniv Pagot, VP of Trading at the Tel Aviv Stock Exchange, pointed to two key developments that could trigger a rate cut at the next decision:

1. U.S. Federal Reserve Decision – September 17
   Market analysts are pricing in an 85% chance that the Fed will cut rates. A U.S. rate cut could strengthen the shekel, pressuring the Bank of Israel to follow suit to maintain competitiveness.

2. August CPI Reading – September 15
   The CPI is expected to rise by 0.5%, but because the index from August 2024 (0.9%) will drop out of the annual calculation, inflation could fall within the Bank’s 1–3% target range, making a rate cut more feasible.

“The convergence of inflation to target, combined with a potential Fed rate cut and more clarity on the Gaza conflict, could finally push the Bank of Israel off the monetary fence,” said Pagot.
“There is no greater relief for the economy right now than easing the real interest rate.”