Current Economic Situation in Israel
The Bank of Israel has decided to keep interest rates steady, citing the ongoing geopolitical and economic uncertainty in the region. Governor Amir Yaron warned that the prolonged conflict with Hamas in Gaza, combined with deteriorating international sentiment, would continue to impact investments and hinder economic recovery.
Impact of Geopolitical Uncertainty
Yaron emphasized that as a small and open economy, Israel relies heavily on its participation in the global economy, including international trade, foreign investment, and collaborations. Therefore, it is crucial for Israel to strengthen its international standing to ensure the economy remains open, entrepreneurial, and robust.
Interest Rate Decision
The decision to keep interest rates steady was made despite fierce scrutiny from Finance Minister Bezalel Smotrich, who threatened to lower taxes if the central bank did not start cutting interest rates to ease the pressure on borrowers. Yaron responded by saying that reducing taxes now would be like drinking espresso after taking a sleeping pill, implying that it would not be an effective solution.
Economic Growth Forecast
The central bank has cut its growth forecast for the economy in 2025 from 3.3% to 2.5%, citing the ongoing conflict in Gaza and the assumption that the fighting will continue at varying intensity until the first quarter of 2026. The economy is expected to grow by 4.7% in 2026, up from a previous estimate of 4.6%.
Inflation Outlook
The Bank of Israel has updated its inflation forecast, expecting year-over-year inflation to hover around 3% at the end of 2025, up from 2.6% in the previous outlook. Assuming the intense fighting will end at the beginning of next year, inflation is forecast to retreat to 2.2% in 2026, versus 2% in the previous forecast.
Conclusion
The current economic situation in Israel is marked by high geopolitical and economic uncertainty, which is expected to continue until the conflict in Gaza is resolved. The Bank of Israel’s decision to keep interest rates steady is aimed at maintaining price stability and supporting economic growth, while avoiding measures that could exacerbate inflation. As the situation continues to evolve, it is essential for policymakers to carefully balance their decisions to ensure the long-term stability and growth of the Israeli economy.
