The Bank of Israel’s decision to maintain its benchmark interest rate at 3.25% yesterday marks a delicate balancing act between stabilizing a war-strained economy and responding to mounting geopolitical pressures. This pause in the monetary easing cycle comes after five consecutive rate cuts totaling 2.0 percentage points since January 2024, signaling a more cautious approach as regional tensions intensify.
According to the central bank’s statement, the decision reflects growing uncertainty about Israel’s economic outlook amid the continuing Gaza conflict and the more recent escalation with Hezbollah along the northern border. Governor Amir Yaron emphasized that while inflation has moderated to 2.3% – within the bank’s 1-3% target range – the persistent security situation demands monetary vigilance.
“The combination of security challenges and their impact on economic activity requires us to maintain policy flexibility,” Yaron told reporters following the announcement. “We’re seeing contradictory signals in the economy that warrant a pause to assess developments.”
The shekel weakened slightly following the announcement, trading at 3.76 against the dollar, reflecting market uncertainty about the country’s economic trajectory. The currency has shown remarkable resilience considering the circumstances, supported by Israel’s robust technology sector and strong foreign exchange reserves, which the central bank reports stand at approximately $213 billion.
Data from Israel’s Central Bureau of Statistics shows the economy contracted 2.0% in the third quarter of 2024, following modest growth earlier in the year. This contraction largely stems from decreased private consumption and investment as security concerns weigh heavily on business and consumer confidence.
The decision to hold rates steady comes against a backdrop of shifting global monetary conditions. The U.S. Federal Reserve has begun its easing cycle, cutting rates by 75 basis points since September. However, the Bank of Israel appears less concerned about interest rate differentials than about maintaining stability in an increasingly unpredictable environment.
Finance Minister Bezalel Smotrich has publicly pressured the central bank for additional rate cuts to stimulate growth, creating tension between fiscal and monetary authorities. “We need more aggressive monetary support to offset the economic impact of the security situation,” Smotrich stated last week at an economic forum in Jerusalem. “Israeli businesses are struggling under the double burden of security concerns and relatively high borrowing costs.”
However, the central bank has maintained its independence, with Governor Yaron emphasizing that decisions are data-driven rather than politically motivated. “Our mandate remains price stability and supporting economic growth,” Yaron noted. “Political considerations do not factor into our deliberations.”
The economic impacts of the ongoing conflicts are becoming increasingly apparent. Tourism, once accounting for about 3% of GDP, has plummeted by over 60% according to Ministry of Tourism figures. Meanwhile, military expenditures have surged by an estimated 12 billion shekels ($3.2 billion) above the original 2024 budget.
Labor market statistics reveal growing concerns, with unemployment rising to 5.7%, up from 3.8% before the conflicts began. The technology sector, typically Israel’s economic engine, has shown surprising resilience, though venture capital investments have declined by approximately 18% year-over-year according to Start-Up Nation Central’s quarterly report.
International credit rating agencies have maintained a cautious stance. Moody’s recently affirmed Israel’s A2 rating but maintained a negative outlook, citing “heightened geopolitical risks and their potential impact on fiscal metrics and growth prospects.” Similarly, S&P Global has warned that prolonged conflict could trigger a downgrade if government debt exceeds 68% of GDP.
Looking ahead, economists from Bank Leumi predict that the central bank will likely resume its easing cycle in the first quarter of 2025, provided inflation remains contained and the security situation doesn’t deteriorate further. “We anticipate another 50-75 basis points of cuts by mid-2025, but the path is highly dependent on geopolitical developments,” said Leumi’s chief economist Gil Bufman in a research note.
The central bank’s next policy meeting in February will provide crucial signals about the direction of monetary policy. Markets will be watching closely for indications of when rate cuts might resume, particularly as economic data continues to show mixed signals about recovery prospects.
For now, the Bank of Israel appears committed to a prudent approach, recognizing that while lower rates might stimulate growth in the short term, maintaining stability in uncertain times may prove more valuable for long-term economic resilience. As Governor Yaron concluded in yesterday’s press conference, “In times of heightened uncertainty, patience in monetary policy is often the most prudent course of action.”
