The Bank of Israel has reduced interest rates by 25 basis points to 4.5% today, marking the first shift in policy since the bank began steadily increasing rates in April 2022. This decision follows data indicating a weakened economy and declining inflation due to the ongoing war between Israel and Hamas. The central bank stated that "the war has significant economic consequences, both on real economic activity and on financial markets." It added, "There is a considerable amount of uncertainty regarding the seriousness and duration of the war, which in turn affects its impact on activity."
The decision to lower borrowing costs comes after maintaining the key lending rate at 4.75% since July. Regarding the economy, the Bank of Israel projected that GDP would grow by 2% in both 2023 and 2024, and by 5% in 2025.
Bank Governor Amir Yaron noted that the costs of the war budget—including expenses and lost income—are expected to reach approximately 210 billion shekels ($58.3 billion). He emphasized that the government should focus on war-related expenses and those that drive growth, while reducing non-essential expenditures, especially those that do not support growth. Yaron predicted that the debt-to-GDP ratio would be 66% by the end of 2024 and 2025.