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

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

• The Bank of Israel has kept its interest rate unchanged at 4%, defying expectations of a 0.25% increase.
• The shekel has strengthened against major currencies, while domestic equity indices have outperformed international counterparts.
• Economic indicators show robust activity, with growth in credit card expenditure and a high level of construction activity, despite falling home prices.

The Bank of Israel's decision to maintain its interest rate at 4% has surprised market participants who anticipated a 0.25% hike. This decision comes amid a moderated inflation environment, with the Consumer Price Index for November showing a 0.5% decline and annual inflation at 2.4%. Forecasters, however, expect a temporary increase in annual inflation in the December CPI reading before it stabilises around the midpoint of the target range.

The shekel has shown notable strength, appreciating by 3.1% against the US dollar, 1.5% against the euro, and 2.2% in terms of the nominal effective exchange rate. This currency strength is occurring alongside a tight but improving labour market, characterised by increased participation and employment rates, and a slowdown in wage growth within the business sector.

Economic activity in Israel remains robust, with credit card expenditure indicating continued growth in the fourth quarter. The construction industry is particularly active, with an increasing annual pace of building starts. However, home prices have continued to decline, and the number of home purchase transactions is on a downward trend.

Domestic equity indices have outperformed international indices, reflecting investor confidence in the local market. Israel's risk premium, as measured by the CDS spread, is near its prewar level, suggesting a stable risk environment.

Looking ahead, the Research Department forecasts GDP growth of 2.8% in 2025, with expectations of 5.2% growth in 2026 and 4.3% in 2027. Inflation is projected to be 1.7% in 2026 and 2% in 2027, assuming the current ceasefire continues.

Trader Insight:
Market participants are closely monitoring the shekel's performance against major currencies, particularly USD/ILS and EUR/ILS, given its recent appreciation. Some traders may consider assessing exposure to Israeli equities, as domestic indices have outperformed international markets. The construction sector's activity could prompt interest in related stocks or ETFs, while the decline in home prices may influence real estate investment strategies. Additionally, the stable risk premium might lead traders to reassess their positions in Israeli government bonds.

Disclaimer: This is not trading advice. For informational purposes only.