Israeli Interest Rate Decision (Jan) 4.0% vs. Exp. 4.25% (Prev. 4.25%)

The inflation environment has moderated. The Consumer Price Index for November declined by 0.5 percent, and annual inflation is 2.4 percent. Forecasters project that there will be an increase in annual inflation in the December CPI reading, and that it will then decline to around the midpoint of the target range.
Since the previous interest rate decision, the shekel has strengthened by 3.1 percent against the US dollar, by 1.5 percent against the euro, and by 2.2 percent in terms of the nominal effective exchange rate.
The labor market remains tight, but the most recent data indicate an easing of the supply restrictions. This is reflected in an increase in the participation and employment rates, a decline in the absentee rate due to reserve duty, and a decline in the pace of wage increases in the business sector.
Current indicators of economic activity point to continued expansion. Credit card expenditure figures indicate continued growth in the fourth quarter, and range around the trend line.
The level of activity in the construction industry is high, and the annual pace of building starts continues to increase. Home prices continued to decline in October, and the downward trend in the number of home purchase transactions continues.
The domestic equity indices increased, and outperformed indices abroad. Israel’s risk premium, as measured by the CDS spread, is near its prewar level.
According to the Research Department forecast, which was formulated under the assumption that the ceasefire will continue, GDP grew by 2.8 percent in 2025, and is expected to grow by 5.2 percent in 2026 and by 4.3 percent in 2027. The inflation rate is expected to be 1.7 percent in 2026 and 2 percent in 2027.