BoI keeps rate at 4.5%; hawkish tone, but easing later this year still possible

ISRAEL - In Brief 27 May 2025 by Sani Ziv

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Policy decision in line with expectationsThe central bank of Israel kept its benchmark interest rate unchanged at 4.5% on May 26th, for the eleventh consecutive meeting. This decision was in line with market expectations. Forward guidance unchangedThe Bank of Israel preserved the exact same forward guidance language in both the April and May monetary policy statements. The Monetary Committee reiterated that the interest rate path will be determined by the pace of inflation’s convergence to the target, the stability of financial markets, the pace of economic activity, and the fiscal stance. This consistent wording signals that the bank continues to follow a cautious approach.Inflation risks move to the forefrontWhile the core guidance is unchanged, the tone of the May statement reflects higher concern over inflation. It highlights the sharp rise in annual inflation to 3.6%, after the 1.1% increase in April’s CPI, and notes that short-term inflation forecasts have been revised upward. Additionally, the May statement omits the forward-looking phrasing used in April, which suggested that “inflation is expected to decline in the coming months”. Instead, the May release highlights that inflation accelerated to 3.6% and is now expected to remain above the upper bound of the target range in the near term. The bank also noted that private forecasters revised their short-term inflation projections upward following the surprise April CPI print.Geopolitical risks remained central The May release also adds references to geopolitical risks, including the effects of large-scale reserve mobilizations on labor market conditions and inflationary pressure.Despite a hawkish tone, disinfla...