'Israel' to hold interest rates as inflation rises amid war on Gaza

By Al Mayadeen English
Source: Bloomberg
26 May 2025 16:02

Economists warn that prolonged war on Gaza, soaring airfare, and political instability are complicating "Israel’s" economic outlook, limiting the central bank’s policy options despite rising inflation.

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An Israeli settler checks the pomegranates displayed at a street market in Haifa, occupied Palestine. August 16, 2024. (AP)

The Bank of Israel is expected to hold its benchmark interest rate at 4.5% for the 11th consecutive meeting, as inflation accelerates and the Gaza war deepens. A survey of economists conducted by Bloomberg showed unanimous expectations for no change, reflecting the central bank’s cautious approach amid mounting economic and geopolitical risks.

"Israel’s" annual inflation rate rose to 3.6% in April, up from 3.3% in March, marking the highest level in eight months outside of January’s VAT-related spike. The figure pushes inflation further beyond the Bank of Israel’s 1–3% target range, raising concerns about the timing of any future interest rate cuts.

A significant portion of the inflation uptick is attributed to a surge in airfare costs, as international carriers suspended flights to "Israel" in response to escalating missile attacks from Yemen’s Ansar Allah movement. With the busy summer travel season approaching, analysts expect upward pressure on prices to continue.

Although "Israel’s" economy grew by 3.4% in Q1 2025, boosted by a temporary two-month ceasefire, that growth is unlikely to persist. Since the end of the truce, "Israel" has intensified its aggression on Gaza, aiming to expand control over 75% of the territory within two months, up from 40% currently, as per the report. The war has strained the labor market, disrupted supply chains, and further complicated the economic impact of the war on Gaza.

Domestically, political instability is adding another layer of uncertainty. Israeli Prime Minister Benjamin Netanyahu’s appointment of a new Shin Bet chief, made in defiance of legal counsel, has heightened tensions between the executive and state institutions. Bank of Israel Governor Amir Yaron has warned that weakening institutional independence could undermine long-term economic growth.

Despite inflationary concerns, analysts believe rate cuts remain unlikely in the short term. Yaron has previously indicated that reductions could begin in the second half of 2025, contingent on inflation slowing and broader market risks being contained.

“There is positive correlation between the strength and independence of the institutions and economic growth,” Yaron said earlier this year. “If markets interpret that there is damage to that strength, it will reflect in damage to the economy.”

Credit default swap spreads, a measure of investor confidence, have narrowed from 121 basis points to 103 since April, but remain elevated compared to levels prior to October 7.

Investor confidence remains volatile

While the shekel has stabilized somewhat due to a weakening US dollar, investor sentiment remains volatile, the report stressed.

The economic effects of the war on Gaza, combined with inflation and political risk, have complicated the central bank’s ability to respond with monetary easing.

According to Bank Hapoalim, the central bank “will find it difficult to reduce the interest rate as long as inflation exceeds the target.” The lender revised its inflation forecast for 2025 to 3.2%, up from 3%.

Rafael Gozlan, chief economist at IBI Investment House, added that “recent developments have significantly increased the probability of rate stability through the end of the year.”