In a surprising turn of events, the Bank of Israel has decided to lower its interest rate, moving from 4.25% to 4%. This marks the second consecutive reduction, following a 0.25% cut made at the end of November. The decision came as a shock to many economists who anticipated that the central bank would maintain the current rate.
Governor Prof. Amir Yaron leads the Bank of Israel’s Monetary Committee, which has pointed out that the inflation landscape is showing signs of easing. Notably, the Consumer Price Index (CPI) for November recorded a decrease of 0.5%, bringing annual inflation down to 2.4%. While forecasters expect an uptick in annual inflation for the December CPI, it is projected to settle around the midpoint of the target range, which is between 1% and 3%.
Additionally, the Bank of Israel noted significant movements in the shekel's value since the last interest rate decision. The shekel has appreciated by 3.1% against the US dollar, 1.5% against the euro, and 2.2% when measured using the nominal effective exchange rate. This strengthening of the currency could have various implications for the economy.
The Research Division of the Bank of Israel has also revised its macroeconomic predictions, updating forecasts that were originally published in September during the peak of the Gaza conflict. The new assumptions include the expectation that the ceasefire will remain intact and that the number of army reservists will continue to decrease. The division anticipates a gradual alleviation of supply-side constraints over the forecast period, alongside a measured rise in domestic demand, which should help alleviate any excess demand pressures.
Looking ahead, the Research Division estimates that GDP grew by 2.8% in 2025. For the years 2026 and 2027, growth is projected at 5.2% and 4.3%, respectively. Furthermore, they predict that the unemployment rate among the prime working age population (ages 25-64) will average 3.3% in 2026 and slightly increase to 3.5% in 2027.
Inflation expectations for 2025 have been adjusted down to 2.5%, a decrease from the 3% projected in September. For 2026 and 2027, inflation rates are expected to be 1.7% and 2%, respectively. Meanwhile, the budget deficit is estimated to be 4.8% of GDP in 2025 and improve to 3.9% in 2026. Public debt is forecasted to hover around 68.5% of GDP across 2025, 2026, and 2027. While this outlook is characterized by reduced uncertainty following the ceasefire, considerable risks still loom over these predictions.
