Israel Holds Interest Rate at 4.5%: A Calculated Gamble in Uncertain Times

Why the Bank of Israel is Holding Firm—For Now

For the ninth consecutive time, the Bank of Israel held its benchmark interest rate steady at 4.5% on February 24, 2025, in line with market expectations. With inflation rising and economic growth struggling to gain momentum, the decision underscores the central bank’s cautious stance as it navigates an increasingly complex financial landscape shaped by taxation policies, supply chain disruptions, and geopolitical instability.

Rising Inflation vs. Sluggish Growth: A Tough Balancing Act

Inflation is Heating Up—How High Will It Go?

The annual inflation rate surged to 3.8% in January 2025, climbing from 3.2% in December 2024—the highest level since September 2023. This inflation spike pushes it beyond the government's 1-3% target range, driven largely by higher VAT, increased utility prices, and persistent supply constraints.

An Economy Stuck in Low Gear: Will Growth Rebound?

While Israel's economy expanded at an annualized rate of 2.5% in Q4 2024, it underperformed expectations. More concerning is the full-year growth for 2024, which stood at just 1%. Forecasts for 2025 project a stronger 4% growth, but the road to recovery remains uncertain, particularly amid labor shortages in key sectors such as construction.

The Shekel’s Unexpected Strength—A Blessing or a Curse?

One bright spot is the shekel’s appreciation since the last rate decision—gaining 1.9% against the U.S. dollar and 1.3% against the euro. This increase in value could help offset some inflationary pressures by making imports cheaper, but it also introduces new risks for exporters and trade competitiveness.

Bank of Israel’s Strategy: Playing the Long Game

The central bank’s decision to hold rates steady reflects its ongoing effort to strike a balance between combating inflation and supporting economic recovery. Key considerations include:

Short-term inflationary pressure: Policymakers anticipate further inflation spikes in H1 2025, primarily due to VAT increases and supply disruptions linked to the ongoing conflict with Hamas.
Medium-term stability: Inflation is expected to moderate in H2 2025, falling within the target range as tax-driven price hikes stabilize and supply chains recover.
Labor market resilience: While the job market has softened slightly, employment remains relatively tight, mitigating concerns of an economic downturn.

How Will Investors Navigate This Uncertainty?

Are Interest Rate Cuts Coming in H2 2025?

Several economists suggest that if inflation cools below 3%, the Bank of Israel may consider rate cuts later in the year. This could provide much-needed relief to borrowers and stimulate economic expansion. However, any rate adjustments will depend on inflation data, currency stability, and fiscal policy shifts.

The Shekel’s Role: Stabilizer or Wild Card?

The shekel’s appreciation could be a double-edged sword. While a stronger currency reduces import costs and dampens inflation, it can also hurt export competitiveness—a critical factor for Israel’s high-tech sector. Investors should closely monitor foreign exchange trends as an indicator of future monetary policy shifts.

Where to Invest? Sectors Poised for Growth and Resilience

Fixed-income assets: If rate cuts materialize in H2 2025, bond markets could see price appreciation, favoring long-duration government and corporate bonds.
Equities: A stable interest rate environment benefits defensive stocks in consumer staples and healthcare, while potential easing in late 2025 could provide a boost to growth stocks, particularly in tech and renewable energy.
Commodities and real estate: Rising inflation and a strong shekel could put downward pressure on commodity prices, while the construction sector continues to face labor shortages, delaying recovery in real estate development.

Key Market Signals to Watch in 2025

Will Inflation Finally Cool Down?

If price pressures subside by mid-2025, expect a shift toward more accommodative policies.

Geopolitical Tensions: The Unpredictable Variable

Escalations in the conflict or unexpected fiscal burdens could force the central bank to remain hawkish longer than expected.

How Will Global Markets Influence Israel’s Rate Policy?

A dovish pivot by the U.S. Federal Reserve or the European Central Bank could create spillover effects, influencing Israel’s rate decisions.

Final Verdict: Navigating a Tightrope Between Stability and Growth

The Bank of Israel’s decision to hold rates steady is a calculated move to navigate inflation and economic uncertainty. While the shekel’s appreciation and anticipated growth rebound in 2025 offer reasons for optimism, investors must remain vigilant.

For now, monetary policy remains on a tightrope—balancing inflation control with the need for economic stimulus. As we move through 2025, the focus will shift toward rate-cut probabilities, currency fluctuations, and geopolitical developments—factors that will shape Israel’s investment landscape in the months ahead.

Israel Holds Interest Rate at 4.5%: A Calculated Gamble in Uncertain Times