The Bank of Israel has opted to keep its benchmark interest rate steady at 4.5%, citing ongoing "geopolitical uncertainty" from the war on Gaza and Lebanon as key factors weighing heavily on the economy.

In its statement, the central bank attributed "the continuing geopolitical uncertainty… [for] delaying the economy's return to the level of activity that characterized it prior to the war."

Preliminary data for the fourth quarter of 2024 reveals a pessimistic economic outlook, with signs of incremental weakening as businesses and households grapple with the fallout from the cost of war. 

Inflation remains above target

According to the Bank, despite a recent easing of inflation, "Israel's" annual rate stood at 3.5% in both September and October, above the occupation's 1-3% target range.

Earlier in the year, the Bank cut interest rates by 25 basis points, marking its first reduction in nearly four years, to alleviate pressure on households and businesses during the war.

However, inflationary pressures, combined with increased defense spending, have left little room for further rate adjustments.

Financial markets and future projections

While "Israel's" financial risk premium has slightly declined, it remains elevated due to the war's continued impact on investor sentiment.

Looking ahead, borrowing costs are expected to decrease gradually, with projections suggesting a drop to 4% by the end of 2025.

This trend follows similar trajectories in the US and Europe, where central banks have signaled an easing of monetary policies.

Read more: S&P sees no major Israeli economic recovery before 2026

According to the Bank, the future trajectory of interest rates would depend on achieving inflation targets, maintaining financial stability, and managing fiscal policies amid escalating defense costs.

"The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy," the central said.