Good afternoon.
Yesterday and today, the Monetary Committee held discussions in order to reach the policy decision. At the end of the meetings, the Monetary Committee decided to leave the interest rate unchanged at 4.5 percent.
The Monetary Committee’s discussions focused on the state of the economy, an analysis of domestic and global economic developments, and the effect of the heightened level of uncertainty on the economy.
Recent days have seen a considerable shock to the global economy, against the background of the new tariff plan announced by the US administration and the expected effects of the program. Equity indices worldwide declined sharply, led by the US stock market, and government bond yields declined markedly. Global growth and world trade forecasts were revised sharply downward. In parallel, in the US there was a decline in the interest rate path expected by the market, and an increase in inflation expectations—an increase that may trickle down to additional countries. These developments are expected to have a notable impact on the Israeli economy, and they were also taken into account in the Monetary Committee’s decision-making process and in the Research Department’s forecast.
Israel’s economy continues to display resilience, and is recovering moderately in view of the complicated period in which we are found, which has very high uncertainty. Despite recent signs of moderation, the inflation rate remains above the target. In parallel, Israel’s risk premium increased notably, impacted by the geopolitical uncertainty. In addition to this, there are the global economic processes, led by the US’s new tariff policy.
I will now discuss in more detail our main considerations when making the decision, and I will expand on the main economic developments in Israel and worldwide.
One-year inflation is 3.4 percent, above the upper bound of the inflation target. In February, there was some moderation, and looking forward, according to forecasters’ assessments, the inflation rate is expected to continue to moderate toward the target over the coming months. Current indicators of economic activity point to a moderate improvement in activity, which has not yet returned to its prewar level. Credit card expenditures increased in the reviewed period. The net balance of the Business Tendency Survey improved in February, returning to its prewar level. Funds raised by high tech companies in the past quarter are similar to the fourth quarter of 2024, and tax revenues remained at a high level, among other things in view of the government’s taxation adjustments that went into effect in the beginning of the year.
Similar to previous months, the labor market is tight, but some moderation can be seen in the labor supply constraint. In February, the broad unemployment rate and the job vacancy rate remained stable. The employment rate and the participation rate among ages 25–64 are still at a high level.
Construction industry activity is recovering, with an increase in the number of employees in that industry, but it is still impacted by work force limitations. Central Bureau of Statistics data indicate that there has been an increase in building starts and permits compared to the previous quarter. Building completions also increased, though their level is still below what it was before the war. Mortgage volume in February was NIS 7.4 billion. In parallel, the upward trend in home prices continued, rising 7.7 percent in the past year.
In the past year, there have been aggressive financing campaigns in the housing market, which temporarily reduced the impact of the decline in demand, but were accompanied by an increase in risk for purchasers and developers. In view of this, the Bank of Israel published guidelines for strengthening consumer protection and risk management, with the goal of balancing continued activity in the market with protection of its stability.
From the previous monetary policy decision through the representative rate set on Friday, the shekel depreciated sharply by 4.3 percent vis-à-vis the dollar and by 9.5 percent vis-à-vis the euro, a trend that has strengthened since Friday. The risk premium, as measured by the CDS and dollar denominated government bond spreads, increased in the reviewed period and its level is high compared to its prewar level. Similar to the rest of the world, Israel’s equity indices declined, though more moderately.
The Moody’s and Fitch rating agencies kept Israel’s credit rating unchanged, with a negative outlook. In their reports, they noted positively the economy’s resilience in view of the war but expressed concern over a possible adverse impact to institutions. As I have noted in the past, the economic literature shows that there is a close and positive connection between the strength and independence of the institutions and sustainable economic growth. In addition, in order to ensure the markets’ continued trust, it is important to act to deal with the economic issues that are raised in the rating agencies’ reports, as well as in the most recent OECD report on Israel’s economy. These are very much in line with the Bank of Israel’s recommendations, particularly the need to increase productivity by improving the education system, investing in infrastructure, and reducing negative incentives to going out to work.
The Research Department updated its macroeconomic forecast. The updated forecast incorporates as well the developments due to the US administration’s new tariff policy. The baseline scenario of the forecast was compiled under the assumption that the direct economic impact due to the moderate increase in intensity of the war will continue for a limited time during the course of the second quarter of this year. The Department’s assessment is that during the forecast period, supply is expected to continue to recover, to an extent that will contribute to the moderation of demand surpluses over time. In addition, based on the forecast, the new tariff policy announced by the US administration is expected to moderate world trade, and to reduce Israel’s exports.
The Department assesses that GDP will grow by 3.5 percent in 2025 and by 4.0 percent in 2026, lower than the previous forecast. According to the forecast, the year over year inflation rate will be 2.6 percent at the end of 2025 and 2.2 percent at the end of 2026. The Department’s assessment is that the government budget deficit will decline compared to the previous forecast, and is expected to total 4.2 percent of GDP in 2025 and 2.9 percent of GDP in 2026. The debt to GDP ratio is expected to be 69 percent of GDP at the end of 2025 and to decline to 68 percent of GDP in 2026.
Beyond the high uncertainty deriving from the developments in the tariff area that are incorporated in the baseline scenario, there is also uncertainty regarding the development of the war. Similar to previous forecasts, the forecast process examined another scenario, of the war expanding. In this scenario, which includes a marked expansion of the fighting in the South for an additional two quarters, there are expected increases in defense expenditures of 2 percent of GDP, in the deficit, and in the debt to GDP ratio to 71 percent. This is alongside an increase in the risk premium and an additional depreciation of the shekel. This scenario also includes an adverse impact on labor supply, in a manner that is liable to lead to a more moderate growth path, about half a percentage point lower than the baseline scenario in 2025, a higher inflation path, and a higher interest rate path.
Regarding the global economy, the tariff policy announced by the US administration has triggered a sharp response in the financial markets, a steep downward revision in the growth forecast, an increase in inflation expectations, and a decline in the interest rate path expected in major economies.
In the US, major equity indices declined, with the S&P 500 Index declining by approximately 16 percent in the reviewed period through Friday, of which 10.5 percent is since the tariff declaration on Wednesday. US bond yields declined by about 40 basis points in the reviewed period. Since the announcement of the tariff program on Wednesday, the Federal Reserve interest rate path expected in the market declined sharply.
Before the announcement of the tariffs plan, the US CPI declined in February to an annual rate of 2.8 percent, and the core index declined to 3.1 percent. In the eurozone, inflation declined to 2.2 percent and core inflation declined to 2.4 percent in the preliminary reading for March. The ECB, for the sixth time, reduced the interest rate by 25 basis points, while the Fed kept the interest rate unchanged, as expected.
In conclusion, it is important to remember that in view of the global developments and the geopolitical situation in Israel, and the considerable volatility in financial markets, uncertainty is at a very elevated level. As such, and even more than ever, the Monetary Committee will work in line with developments in markets and data—termed “data-dependent” in the literature.
The Bank of Israel and the Monetary Committee continue to express our support and appreciation for the soldiers and other security forces who are fighting bravely for us on the various fronts, and we continue to hope for the speedy return of all the captives and the missing, and a rapid and complete recovery for the injured, in body and spirit.
I take this opportunity to wish you all a happy and healthy Passover.