The Bank of Israel is expected to leave short-term interest rates unchanged at a policy meeting next week after inflation spiked in January, although analysts believe a rate cut is possible in the coming months should price pressures ease.
All 13 economists polled by Reuters said they expected the central bank to keep its benchmark rate, opens new tab at 4.5% when the decision is announced on Monday at 4 p.m.
The rate has stayed at 4.5% since January 2024, when it was cut from 4.75%.
Israel's annual inflation rate, opens new tab accelerated to 3.8% in January, its highest level since September 2023, from 3.2% in December.
That was followed by data showing the economy grew by an annualized 2.5% in the fourth quarter and 1% for all of 2024.
Israel's inflation
The rise in inflation last month was widely expected since prices on a host of goods including water and electricity, as well as some taxes, rose at the start of 2025. The government also partly blames war-related supply issues for sticky inflation.
The Bank of Israel, though, believes these are temporary and expects the inflation rate to ease back within its 1-3% annual target range in the second half of the year. Should that happen, central bank chief Amir Yaron said there could be one or two rate cuts later in 2025. The bank also sees 4% economic growth this year.
"While monetary policy is forward-looking, the Bank of Israel will find it difficult to reduce the interest rate when inflation year over year is significantly above the upper bound of the target range - even if inflation expectations are close to 2%," said Bank Hapoalim economist Victor Bahar.
"The sovereign risk premium has stabilized, and this will not be the factor preventing a reduction in the interest rate."
Israel's high risk premium has fallen sharply in recent weeks since Israel forged a ceasefire deal with Palestinian militant group Hamas, whose attack on Oct. 7, 2023 triggered the war.
Israel's five-year credit default swap (CDS), the cost of insuring its debt against default, is trading at 87 bps, around the same rate as when the ceasefire was announced last month after peaking at 167 last October.
Citi economist Michel Nies believes that the decline in Israel's risk premium could prompt a rate cut at the May policy meeting as long as the inflation rate comes down.
"Given the high degree of uncertainty about the pace at which labour supply and potential output can recover, we expect the Bank of Israel to tread carefully when it comes to lowering rates out of restrictive territory," he said.