Good afternoon.
In June, the State of Israel, in collaboration with the US, waged a battle intended to remove the Iranian nuclear threat. Reducing strategic threats on the various fronts is crucial to the state’s security, and supports prosperity and economic development.
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 geopolitical uncertainty on the economy.
Recent weeks have seen considerable uncertainty, against the background of Operation Rising Lion and its effects on Israel’s residents and its economy. The immediate budgetary cost of the operation is estimated at around 1 percent of GDP. Israel’s economy continues to display resilience in our current complex period. The economy’s strong fundamental underpinnings have enabled it to minimize the adverse impact and to maintain stability, even in view of the impact on economic activity and the associated costs of the Swords of Iron War and Operation Rising Lion.
In the reviewed period, the inflation rate declined, but it is above the upper bound of the target range. Markets are reflecting the assessment that there has been an improvement in Israel’s geopolitical standing—domestic equity indices increased notably compared to the rest of the world, government bond yields declined sharply, and the shekel has strengthened considerably. Israel’s risk premium decreased markedly, though it remains higher than its level just before the Swords of Iron War. With that, it is important to remember that the State of Israel is still dealing with the economic ramifications of the war, and GDP is below the level that would have been expected based on its prewar trend.
I will now discuss in greater detail the main considerations that we took into account when reaching the decision, and I will expand on the main economic developments in Israel and worldwide.
Inflation over the past 12 months declined to 3.1 percent, slightly above the upper bound of the target range. The monthly CPI readings were volatile, impacted by the flights abroad component, among other things. According to assessments of forecasters and of the various sources from the market, inflation in a year is expected to be near the midpoint of the target.
Looking forward, we can identify two forces, which can be expected to impact in opposing directions on the development of inflation. The first is the strengthening of the shekel, which is expected to assist in reducing inflation. In contrast, the decline in the risk premium in view of the operation in Iran and the increase in the possibility of an agreement on the Gaza front could lead to the expansion of demand at a more rapid pace than that of the moderation in the supply constraints in the labor force. Such a development is expected to work toward an increase in inflationary pressures. At this point in time, there is uncertainty regarding the relative intensity of the impact of these two forces in the various time ranges.
According to National Accounts data, economic growth in the first quarter of 2025 reached 3.7 percent, near the economy’s estimated long-term growth trend. However, the overall level of economic activity remains approximately 4 percent below this trend line, reflecting, among other factors, supply-side constraints. Current economic indicators point to a moderate recovery in activity. The aggregate balance of the Business Tendency Survey declined sharply in June, against the background of Operation Rising Lion, following several months of stability. The Central Bureau of Statistics’ Consumer Confidence Index for May remained at a low level. In the reviewed period, credit card expenditures dropped sharply during Operation Rising Lion but rebounded quickly once it ended. Capital raised in the high-tech sector has increased substantially in recent months, reaching levels comparable to early 2022.
The labor market remains tight. The ratio of job vacancies to unemployed hovers at a high level, despite some decline in the most recent data in view of a modest increase in the unemployment rate. Employment and participation rates among individuals aged 25–64 are slightly below their levels prior to the Swords of Iron War. Wages across the economy are rising at an annual rate of slightly over 4.5 percent. Over recent months, the growth rate of wages in the business sector has been relatively high. Wages in the business sector excluding high tech are increasing at an even higher pace while in the public sector the pace is moderate.
Construction industry activity moderated in the first quarter but remains at a high level. According to Central Bureau of Statistics data, the number of building starts in the first quarter of 2025 was 8 percent lower than in the previous quarter, but they are still at a level that is about 6.5 percent higher than in the corresponding quarter of the previous year. Mortgage volume in May totaled approximately NIS 9.3 billion, similar to recent months. However, the number of real estate transactions remains somewhat lower compared to recent years. In parallel, the annual rate of increase in home prices continues to moderate, reaching 5.1 percent. Rent prices for new tenants rose by 5.2 percent in May. In addition, the damage caused by the missile attacks from Iran is liable to lead to increased demand for rentals and upward pressure on rental prices in affected areas. Easing the labor constraint in the construction sector—among other ways through the recruitment of foreign workers—is expected to support higher housing supply, and could be reflected in continued moderation of housing prices.
Business credit continued to increase by a pace similar to that of previous months, with a continued downward trend in the share of arrears in all activity segments. In parallel, credit to households also continued to increase, and there has been no notable increase in arrears. According to the Business Tendency Survey of the Central Bureau of Statistics for June, the share of companies reporting a severe credit constraint remains low.
With the onset of Operation Rising Lion, the Bank of Israel adopted several measures to support economic activity, among them leading and publishing a banking framework to support households and businesses that were adversely impacted by missile attacks. This was with the goal of providing these populations with a longer period of time to organize financially. In addition, the Bank acted to ensure the orderly functioning of the markets, payment systems, and provision of cash in the state during emergency times as well. All this was in parallel with maintaining an ongoing connection with all the relevant functions in the government and the business sector.
Since the previous monetary policy decision, the shekel strengthened by 7.3 percent against the dollar and by 3.8 percent against the euro, with high volatility against the background of the geopolitical developments. Due to the end of Operation Rising Lion, Israel’s risk premium, as measured by CDS spreads, declined markedly, but it is still higher than its level just before the Swords of Iron War. In the capital market, domestic equity indices increased sharply, and government bond yields declined markedly.
The Research Department updated its macroeconomic forecast. The updated forecast incorporates the developments from Operation Rising Lion as well. In terms of the fighting in Gaza, the forecast was compiled under the assumption that the agreement toward a cease fire in Gaza currently being discussed will lead, on the forecast’s horizon—beginning from July—to there not being intense fighting in Gaza. The forecast also assumes that the ceasefire with Iran will be maintained. The Department’s assessment is that during the forecast period the moderation in supply constraints will continue, with an increase in demand for private consumption and for investments. In addition, the moderation in the impact of the global trade war will continue.
According to the Department’s assessment, GDP will grow by 3.3 percent in 2025 and by 4.6 percent in 2026. Year over year inflation will be 2.6 percent at the end of 2025 and 2.0 percent in 2026. The government budget deficit will increase compared to the previous forecast, and is expected to total 4.9 percent of GDP in 2025 and 4.2 percent of GDP in 2026. The debt to GDP ratio is expected to be 70 percent of GDP at the end of 2025 and to increase to 71 percent of GDP in 2026, slightly higher than the previous forecast.
The forecast is characterized by a high degree of uncertainty. In contrast to previous forecasts, in this forecast the uncertainty is in two directions: there are risks to the upside and to the downside. The risks derive mainly from the uncertainty stemming from the geopolitical developments on the Gaza and Iran fronts. The developments will impact on the pace of economic recovery, on the development of the path of inflation, the budget deficit, and on the debt to GDP ratio.
Taking into account the cost of the continuing war, and in contrast the change in the geopolitical situation, it is crucial that the coming budget will be accompanied by a reassessment of priorities, in a manner that will make it possible to continue maintaining responsible fiscal policy alongside the providing of a response to security needs. As I have said in the past, it is extremely important to establish a policy path that will lead to the debt to GDP ratio not getting out of hand for a lengthy period of time, and will converge to a downward trend in the coming 2 years. The budget frameworks approved in 2024 and 2025, and the fiscal adjustment steps that were adopted alongside them—particularly the 2025 budget—contributed to the markets’ confidence in the Israeli economy and to the moderation of the risk premium.
The pace of economic activity worldwide remains moderate and there has been a slight revision downward in the global growth forecast. Compared to the April forecast, although there has in fact been some decline in the expected impacts of the trade war, the uncertainty regarding trade agreements and their impacts are still high. Due to the conflict with Iran, there was particularly high volatility in oil price worldwide, but with the announcement of the ceasefire, oil prices declined and stabilized at $68 per barrel. In the US, the CPI increased in May to an annual rate of 2.4 percent, and the core rate remained unchanged at 2.8 percent. In the eurozone, a preliminary reading for June shows that inflation increased slightly to 2 percent, and the core reading remained unchanged at 2.3 percent. In the most recent interest rate decisions, the Fed kept the interest rate unchanged and the ECB continued the path of interest rate reductions, lowering rates by 25 basis points.
In conclusion, I would like to emphasize that price stability is a condition for an orderly and growing economy, and inflation adversely impacts the weaker population groups first and foremost. It is important to remember that the geopolitical and economic uncertainty in Israel is still at a very high level. In such an environment, it is necessary to have a clearer picture of the economic trends and the convergence of inflation to within the target range. Therefore, we must adopt a cautious policy, and the Monetary Committee will act, in accordance with developments in the markets and in the data, as the literature terms it, “data dependent”.
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.
Thank you.