Israel Central Bank maintains interest rate at 4.5% amid moderate economic recovery

Investing.com -- The Bank of Israel's Monetary Committee decided on January 6, 2025, to keep the interest rate steady at 4.5%. This decision comes in light of geopolitical developments and a moderate pace of economic recovery. Supply constraints in various sectors persist, slowing the reduction of the gap between the actual GDP and its long-term expected level.

The inflation rate remains at 3.4%. Tax alterations, particularly the VAT increase, along with ongoing supply constraints and excess demand, are anticipated to boost the inflation rate in the first half of the year. However, inflation is expected to moderate within the target range during the second half of the year.

The Research Department anticipates GDP growth of 0.6% in 2024 and 4.0% in 2025, a slight increase from the October forecast. The Department also predicts a GDP growth of 4.5% in 2026. The labor market shows minor improvements in participation and employment rates, coupled with a slight decrease in broad unemployment and moderate wage increases.

The country's risk premium has significantly decreased, as shown in the 5-year CDS, the spread of dollar-denominated government bonds, and the yield on shekel bonds. However, the level remains high compared to the prewar period.

Since the last interest rate decision, the shekel has appreciated by approximately 0.5% against the US dollar, 2.4% against the euro, and 1.9% in terms of the nominal effective exchange rate.

The housing market saw a continued rise in the annual rate of increase in housing prices, reaching 6.7%. However, construction industry activity remains lower than the prewar period, mainly due to significant manpower limitations.

The Monetary Committee’s policy, in view of the ongoing war, focuses on stabilizing the markets and reducing uncertainty, along with price stability and supporting economic activity. The interest rate path will be determined according to the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy. The next decision regarding the interest rate will be published on Monday, February 24, 2025.

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Source: Investing.com