Israel: Central Bank leaves rates unchanged in January
Latest bank decision: At its meeting on 6 January, 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 headline and core inflation are both above the upper bound of the Bank’s 1.0-3.0% target range and could rise further in the near term due to a VAT hike. On the flipside, hiking rates was not warranted either, as 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. Moreover, the Bank noted that inflation expectations for the coming year had declined. 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: There was no explicit forward guidance in the Central Bank’s press release, with future inflation, exchange rate movements and the developments of the war likely to play a key role in determining monetary policy ahead. All our panelists expect rate cuts in 2025, with forecasts ranging from one to four 25 basis-point cuts.
Panelist insight: On the outlook, Goldman Sachs analysts said:
“The BoI’s guidance was incrementally dovish in our view. […] absent a surprise deterioration in either geopolitical uncertainty or the fiscal outlook, the main variable the BoI will consider before recommencing a cutting cycle will be inflation. If inflation surprises to the downside of the BoI’s forecast (inflation peaking at ca +4%yoy in Q1), we think there is a good case for a cut in the first half of this year.”