Bank of Israel Holds Rates Amid Ongoing Gaza Conflict, Lowers 2025 Growth Forecast

The Bank of Israel has maintained its short-term interest rate at 4.5% for the 14th consecutive time amid ongoing geopolitical tensions and economic uncertainty stemming from the prolonged conflict with Hamas in Gaza. Governor Amir Yaron highlighted the challenges posed by high geopolitical risks and deteriorating international sentiment toward Israel, which continue to suppress economic growth and investment. Despite inflation easing to 2.9% in August, within the government's target range, the central bank chose not to cut rates, emphasizing the need for responsible monetary policy to support economic resilience. The bank revised its economic growth forecast downward for 2025 to 2.5%, reflecting the impact of the conflict and international isolation, while projecting modest improvement in 2026 assuming the conflict ends early in the year. Finance Minister Bezalel Smotrich has criticized the central bank for not lowering rates sooner, proposing tax cuts as an alternative, but Yaron cautioned against such measures, underscoring the importance of monetary stability. The decision comes just before a scheduled meeting between Prime Minister Benjamin Netanyahu and President Donald Trump to discuss potential resolutions to the Gaza war.