Bank of Israel holds rates; future easing less likely as Gaza operation gets underway

ISRAEL - In Brief 20 Aug 2025 by Sani Ziv

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As we expected, the Bank of Israel kept the benchmark rate unchanged at 4.5% yesterday, for the 13th consecutive meeting. The tone was cautious and hawkish, with emphasis on inflation risks, geopolitical uncertainty, and a tight labor market. The bank also mentioned signs of a rapid recovery after the sharp but temporary hit from Operation Am Kalvi.  Our key question today is whether we can expect to see any rate cut in 2025. There are two more committee meetings left this year, on September 29 and November 24. The statement provided very little forward guidance for now. The Bank of Israel offered only one line of forward guidance: “Amid geopolitical uncertainty, the rate path will be determined by inflation’s return to target, stability in financial markets, economic activity, and fiscal policy”. We read this statement as viewing the current rate as appropriate unless conditions change. So what does that mean in practice? Do we need to see inflation back at 2%, the midpoint of the target range, before the bank even considers cutting? And how long must inflation stay there before they are convinced? Our forecasts show inflation falling towards 3% already in August (2.8%) but then rebounding to 3.2% in December, reflecting base effects and volatile components. Even in 2026, we see inflation staying slightly above 2.5% or higher, and if high military spending on Gaza’s occupation is financed through higher taxes, inflation could easily rise above 3% again. On the fiscal side, if the deficit stays above 3% of GDP, will the bank refuse to ease? Geopolitically, the risk premium has declined, but the new operation in Gaza will likely take months with high budget costs, keepi...