The Monetary Committee decides on January 6, 2025 to leave the interest rate unchanged at 4.5 percent | בנק ישראל - הבנק המרכזי של ישראל
Central bank: boi | Type: statement | Date: 2025-01-06

The Monetary Committee decides on January 6, 2025 to leave the interest rate unchanged at 4.5 percent
In view of geopolitical developments, the recovery in economic activity continues at a moderate pace. Supply constraints in some industries continue to hinder the narrowing of the gap between actual GDP and its expected level according to the long-term trend.
06/01/2025
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In view of geopolitical developments, the recovery in economic activity continues at a moderate pace. Supply constraints in some industries continue to hinder the narrowing of the gap between actual GDP and its expected level according to the long-term trend.
The inflation rate remains stable at 3.4 percent. Tax changes, particularly the increase in VAT, along with continued supply constraints and excess demand, are expected to raise the inflation rate in the first half of the year, and inflation is expected to moderate to within the target range during the second half of the year.
The labor market remains tight, with slight improvements in participation and employment rates, alongside a slight decrease in broad unemployment and moderate wage increases.
The country's risk premium declined significantly, as reflected in the 5-year CDS, the spread of dollar-denominated government bonds, and the yield on shekel bonds. The level is still high relative to the prewar period.
Since the last interest rate decision, the shekel has appreciated by approximately 0.5 percent against the US dollar. The shekel also appreciated by 2.4 percent against the euro, and by 1.9 percent in terms of the nominal effective exchange rate.
In the housing market, the annual rate of increase in housing prices continued to rise, to 6.7 percent. Activity in the construction industry remains lower than the prewar period, mainly affected by manpower limitations that remain significant.
In view of the continuing war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.
The recovery in economic activity continues at a moderate pace, in view of geopolitical developments.  The supply constraints in some industries continue to delay the narrowing of the gap between the actual level of GDP and its expected level according to the long-term trend.  The inflation rate was stable, but above the upper bound of the target range.  Taxation changes, particularly the increase in VAT, alongside continued supply constraints combined with surplus demand, are expected to raise the pace of inflation in the first half of the year, following which inflation is expected to moderate to within the target range in the second half.  The economy’s risk premium declined markedly, but remains higher than in the prewar period.
The Consumer Price Index for November declined by 0.4 percent.  The inflation rate in the past 12 months remained stable, at 3.4 percent, slightly above the upper bound of the target range (
).  Net of energy and fruit and vegetables, the annual inflation rate is the same as it was in the previous month—3.3 percent
(Figure 2)
. The annual rate of increase in the pace of inflation in the nontradable components stabilized at 3.7 percent, and the rate of inflation of the tradable components is 2.8 percent in the past 12 months
(Figures 4)
. According to forecasters’ projections, inflation will continue to increase at the beginning of 2025, partly in view of the increase in VAT, and will then moderate toward the upper bound of the target in the second half of the year
(Figure 5)
. According to the various sources, inflation expectations for the coming year have declined to within the target range (
).  Expectations for the second year onward remain within the target range (
In the Committee’s assessment, there are several risks for a possible acceleration of inflation: geopolitical developments and their impact on economic activity, prolonged supply constraints, volatility of the shekel, and fiscal developments.
Since the previous interest rate decision, the shekel has appreciated by 0.5 percent against the US dollar, by 2.4 percent against the euro, and by 1.9 percent in terms of the nominal effective exchange rate.
). According to the current forecast, GDP is expected to grow by 4.5 percent in 2026.  In the Department’s assessment, the various supply side limitations are expected to subside gradually, but domestic demand is expected to recover, initially at a slightly higher pace.  The forecast also takes into account the expected effect of the budget adjustments on economy activity. The broad unemployment rate among the prime working ages (25–64) is expected to remain low, and is expected to average 3.1 percent in 2025 and in 2026.   The annual inflation rate is expected to be 3.4 percent in 2024 (compared with 3.8 percent in the October forecast), 2.6 percent in 2025 (compared with 2.8 percent in the October forecast), and 2.3 percent in 2026.
Similar to the forecasts since the outbreak of the war, this forecast is characterized by a high level of uncertainty.  However, geopolitical developments since the October forecast have reduced the risk of a situation in which growth will be markedly lower than the forecast.  The government’s approval of the budget, and the Knesset’s passage of the package of tax measures, have moderated the risks that the debt will grow out of control and that the risk premium will increase as a result.
Current indicators of economic activity during the reviewed period show some recovery. In November and December, there was a marked increase in credit card expenditures (
).  The aggregate balance of the Central Bureau of Statistics Business Tendency Survey increased in November and December, but remains lower than its prewar level (
).  However, in certain industries, there was no marked improvement.  Capital raised in the high-tech industry in October and November was similar to 2019 and prewar levels (
).  The Composite State of the Economy Index for November remained similar to the September and October index readings, and the Purchasing Managers Index remains below the trend line.  The consumer confidence index remained negative, and even declined slightly.  The current account surplus in the third quarter increased moderately, in view of the increase in services exports.  Foreign trade data for November indicate an increase in the import of consumption goods and raw materials during 2024, and a moderate decline in exports (excluding ships, aircraft, and diamonds) in the most recent figures (
Figures 20 and 21
The cumulative deficit in the government budget declined to 7.7 percent of GDP in November in annual terms.  Aggregate expenditures since the beginning of the year increased by 24.5 percent relative to the same period in the previous year, and revenues increased by 8.9 percent.  Tax revenues remained stable at a high level and, net of seasonality and one-off revenues, they are 3–5 percent higher than their long-term real trend.
The labor market remains tight. The job vacancy rate increased slightly in November, but remained slightly lower than its June-July level (
). The participation rate among those aged 15 and older increased slightly in November (to 62.7 percent), as did the employment rate (to 61 percent) (
Figure 12a
).  The rate of those temporarily absent due to reserve military service in November was relatively high, at about 1.4 percent, but it is expected to decline in December due to soldiers being released from service.  The broad unemployment rate declined slightly in November, to 3.2 percent (
Figure 12b
). Nominal wages increased moderately in recent months, and real wages were higher than their prewar level, but a gap remains relative to the long-term trend
(Figure 13)
Activity in the construction industry remains low relative to before the war, mainly affected by manpower limitations that remain significant (
Figure 15b
). According to Central Bureau of Statistics data, building starts increased by about 20 percent in the third quarter, seasonally adjusted, relative to the second quarter, but were about 7 percent lower than the same quarter of 2023. Building completions increased by about 7 percent in the third quarter relative to the previous quarter, but were about 11 percent lower than in the same period in 2023. Building starts in the last four quarters were about 10 percent lower than in the previous four quarters, and building completions were about 6 percent lower (
Figure 18a
). The housing price index increased by 0.3 percent in November.  New mortgage borrowing totaled about NIS 8 billion in November (
Figure 18b
In the equities market, Israel outperformed the global trend in 2024, with a marked increase during the reviewed period (
).  Israel’s risk premium, as measured by the 5-year CDS and by the dollar-denominated government bond spread, continued to decline, although its level remains higher than the prewar period. In the shekel-denominated government bond channel, the downward trend in yields continued, but yields remain markedly higher since the beginning of 2024 (
).  Business credit continued to expand, led by credit to large businesses, mainly in the construction and real estate industry.
Globally, economic activity continues to expand. The global composite Purchasing Managers Index for November increased, indicating continued expansion of economic activity. However, the manufacturing component for December declined slightly, again suggesting contraction. World trade in commodities is growing at a moderate pace, expanding by an annual rate of approximately 1.6 percent in October. Growth in the United States remains strong, supported by private consumption and exports. In Europe, the gradual recovery continues, with GDP growing by 1.6 percent in annual terms in the third quarter. In China, the government continues to implement monetary and fiscal expansion measures, but their impact on the pace of activity has been moderate so far.
In the United States, the Consumer Price Index (CPI) rose by 0.3 percent in November, to an annual rate of 2.7 percent. Inflation expectations for the next two years remained high, partly due to concerns about the imposition of tariffs and an expansionary fiscal policy. As expected, the Federal Reserve (FED) reduced the interest rate by another 25 basis points, and the interest rate trajectory priced in the markets increased during the reviewed period, reflecting a higher interest rate forecast by the FED (
Inflation in the eurozone reached 2.2 percent in November, with core inflation remaining unchanged at 2.7 percent, compared to forecasts of slightly greater increases. Projections indicate convergence to the ECB's target in the coming year. The ECB continued its path of interest rate cuts, reducing the rate by 25 basis points, and is expected to continue lowering the rate at a relatively rapid pace.
The minutes of the monetary discussions prior to this interest rate decision will be published on January 20, 2025. The next decision regarding the interest rate will be published on Monday, February 24, 2025.
Interest rate decision dates for 2024 and 2025 are available at:
https://www.boi.org.il/en/economic-roles/monetary-policy/interest-rate-announcement-dates-2024/