Israel’s central bank left interest rates unchanged, seeking to balance the impact of rising inflation against weak growth as uncertainty surrounds fiscal policy.

The monetary committee kept its benchmark rate at 4.5% on Wednesday (August 28) for a fifth straight meeting, in line with the forecasts of all economists surveyed by Bloomberg.

In a statement accompanying the decision, policymakers largely repeated previous guidance, saying the focus should be on stabilizing markets, controlling price rises and supporting economic activity. Inflation has been on the rise, mostly linked to the war against Hamas.

“Since the outbreak of the war, and in recent months in particular, geopolitical uncertainty and its economic ramifications have increased,” the committee said. “These, alongside fiscal uncertainty, are also reflected in the high yield spreads between Israeli government bonds and US bonds.”

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Israeli Central Bank Governor Amir Yaron has been particularly concerned about fiscal policy in recent weeks, calling for budgetary cuts totalling some 30 billion shekels ($8 billion) to balance increased defense expenditure related to the ongoing Gaza conflict.

Yet Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich have delayed discussions on the 2025 budget, set to be the most challenging in decades, despite the process usually being well underway by this time of year.

Israel’s 12-month trailing deficit has risen to 8.1% as of July, with the central bank anticipating a year-end figure of 6.6% — if there are no unexpected additions to the defense budget.

“The uncertainty surrounding the state budget for 2025, and the implementation of adjustments required to reduce the deficit on an ongoing basis, contributes to an increase in the risk premium and is liable to weigh on the return of inflation to its target,” the policymakers said.

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Inflation has risen from 2.5% year-on-year in February to 3.2%, above the country’s official target of 1% to 3%. “There is a great deal of uncertainty regarding fiscal developments, which affects the desired ‘policy mix’ from the central bank’s perspective and prevents an interest rate reduction,” Gil Bufman, chief economist at Leumi Bank, said in a statement.

Easing Path

JPMorgan Chase & Co. expects just one more rate cut of 25 basis points this year, followed by another 50 basis points of easing by the middle of 2025. “The Bank of Israel will continue to err on the side of caution near term, especially as the geopolitical environment remains tense,” the bank’s Anatoliy Shal said in a recent note.

Still, the central bank may, he said, be forced into “a more delayed and shallower” easing cycle if the war in Gaza drags into a second year. The Bank of Israel said last month it expects a base rate of 4.25% in the second quarter of 2025.

Gross domestic product grew by 2% last year, almost half the rate the finance ministry expected prior to the outbreak of the war. The bank said the weak growth is mainly caused by supply limitations, primarily due to the shortage of workers.

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Restrictions on people travelling from Palestinian territories to work in Israel have hurt the construction industry, while the military has called up reservists to bolster troops in Gaza and on the Lebanese border.