Bank of Israel Holds Interest Rate at 4.5% Amid Inflation, Geopolitical Risks

The Bank of Israel maintained its benchmark interest rate at 4.5% for the twelfth consecutive meeting, reflecting ongoing economic recovery amid significant geopolitical uncertainties, particularly related to conflicts with Iran and Hamas. Inflation eased to 3.1% in May but remains above the government’s target range of 1% to 3%, prompting the central bank to adopt a cautious stance before considering any rate cuts. The economy showed moderate growth with a 3.7% annualized GDP increase in Q1 2025, slightly adjusting down its growth forecast for 2025 to 3.3% due to the impacts of conflict, while raising the 2026 forecast to 4.6%. Despite a rally in the shekel and a decline in Israel’s risk premium following military operations, the central bank highlighted risks of inflation acceleration linked to geopolitical developments, demand pressures, supply constraints, and global trade conditions. Most economists expected no change in the rate, with the bank emphasizing that future monetary policy will be guided by inflation convergence, financial market stability, economic activity, and fiscal policy. The decision underscores a wait-and-see approach as the Bank monitors inflation trends closely, balancing economic support with inflation control amid regional instability.