Israel’s central bank governor said on Tuesday that he sees one to two potential interest rate cuts in the second half of this year, indicating confidence that domestic inflation will ease in the coming months.
Inflation, which reached 3.2% in December, “is still above our target, which is between 1% and 3%,” Bank of Israel Governor Amir Yaron told CNBC’s Dan Murphy at the World Economic Forum in Davos.
“We expect (inflation) … to pick up in the first half of the year, partly because of the tax, and partly because, as the recovery takes place, we see demand moving faster than supply constraints,” such as those in the labor market, he said.
But while the bank expects costs to rise in the first half of the year, “in the second half we hope that (inflation) will come to a balance, moderate,” Yaron said. “We see that one or two cuts are feasible in the second half of the year, as inflation should be on target.”
Rating agencies Fitch and Moody’s on Tuesday assessed the latest developments regarding the ceasefire between Israel and Hamas. Moody’s said the deal would reduce downside risks to Israel’s economy and finances, while Fitch said a long-term ceasefire would ease Israel’s credit risks, although its fiscal position would remain weaker than it was before the war.
“A permanent cessation of the war in Gaza would reduce the risks covered by the Negative Outlook on Israel’s ‘A’ sovereign rating,” Fitch said in a Tuesday report.
The central bank governor also said he expects Israel to record GDP growth of 4% in 2025 and 4.5% in 2026, compared to its expectations of 0.6% growth in 2024 — “until we see further escalations.”
Hundreds of people gather in Israel for a protest demanding the immediate return of hostages to their homes after a ceasefire comes into effect, January 18, 2025 in Tel Aviv, Israel.
Nir Keidar | Anadolu | Getty Images
“I hope the ceasefire is a turning point from October 7 (2023), that terrible day,” Yaron said. “All the trouble that we’ve seen, people see on both sides… I think if it has a lasting effect, it should pave the way for regional arrangements that, you know, facilitate rehabilitation and, importantly, sustainable security. That will ensure economic growth, which will obviously help the Israeli economy, but not just the Israeli economy — I think it will help the region as a whole.”
The ceasefire agreement, brokered by negotiators from Qatar, Egypt and the US, is currently in its first phase, which is expected to last for 42 days and will see Hamas release 33 Israeli prisoners taken during the October 7, 2023 attack, in exchange for at least 1,700 Palestinians are currently imprisoned in Israel.
During this phase, increased humanitarian aid will be deployed to all parts of the Gaza Strip, while hospitals and health centers will be rebuilt and critical fuel supplies will arrive in the enclave.
Israel has spent approximately 100 billion shekels ($28 billion) on military conflicts in 2024, its finance ministry announced Tuesdaywhich sharply increased the state’s borrowing and debt. The country’s debt-to-GDP ratio increased from 61.3% in 2023 to 69% by the end of 2024.
In September, Moody’s downgraded Israel’s credit rating by two notches from “A2” to “Baa1”, keeping its outlook at “negative” at the time. He bases his move on the escalation of the conflict between Israel and the Lebanese militant group Hezbollah. The warring parties reached a cease-fire agreement in November.