Israel’s Central Bank Raises Interest Rate Forecast Amidst War and Economic Uncertainty
Israel’s central bank has raised its interest rate forecast for the third quarter of 2025 to 4.5%, citing persistent inflation and the mounting costs of the ongoing conflicts in Gaza, Lebanon, and with Iran, Bloomberg reports.
This upward revision comes despite the bank’s previous prediction of 4.25% for the second quarter.
Bank of Israel Governor Amir Yaron has repeatedly stated that rate cuts are unlikely before the second half of 2025, as inflation is projected to slow back to target levels only within that timeframe. The bank forecasts inflation to end the year at around 3.8%.
The current economic climate is further complicated by the escalating conflicts. Israel’s military operations in Lebanon and Gaza, alongside the heightened tensions with Iran, have significantly impacted the economy. The war effort has placed a heavy burden on government finances, leading to a recent downgrade of Israel’s credit rating by Moody’s and S&P Global Ratings.
The cost of a prolonged conflict in Lebanon or Iran will further strain the government’s budget. The 2024 budget is expected to be revised for a third time this year, potentially including a larger projected deficit than the original 6.6% of GDP.
The central bank now predicts a fiscal deficit of 7.2% for 2023, the largest in Israel this century excluding the COVID-19 pandemic in 2020. This figure is expected to decrease to 4.9% in 2025, contingent on the government implementing spending cuts and tax hikes totaling approximately 30 billion shekels ($8 billion).
However, even with these measures, the deficit would still exceed the government’s target of 4% for next year.
The 2025 budget is scheduled for approval by Prime Minister Netanyahu’s cabinet at the end of October and will then require parliamentary approval before the end of March to avoid a government collapse.
The proposed budget includes tax measures aiming to increase revenue by 13 billion shekels, but there’s no guarantee that Netanyahu’s coalition will agree to the larger adjustments recommended by the central bank.
Some analysts argue that the Israeli economy is too fragile to withstand further interest rate hikes, even as inflation rises.
