Israel’s central bank governor on Tuesday said he sees one to two potential interest rate cuts in the second half of this year, suggesting confidence that domestic inflation will ease in the coming months.
Inflation, which hit 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] … in the first half of the year to go up, partly because of taxes, and partly because, as recovery is happening, we’re seeing demand moving faster than supply constraints,” such as those in the labor market, he said.
But while the bank expects costs to go up in the first half of the year, “in the second half, we are hoping [inflation] will come into balance, moderate itself,” Yaron said. “We are seeing one or two cuts feasible in the second half of the year, as inflation is supposed to go into the target.”
Ratings agencies Fitch and Moody’s on Tuesday weighed in on the latest ceasefire developments between Israel and Hamas. Moody’s said the agreement will reduce downside risks to Israel’s economy and finances, while Fitch said that a lasting ceasefire will ease Israel’s credit risks, although its fiscal position will remain weaker than it was before the war.
“A durable cessation of the war in Gaza would reduce risks captured by the Negative Outlook on Israel’s ‘A’ sovereign rating,” the report from Fitch read on Tuesday.
The central bank governor also said he anticipates Israel will log a GDP growth of 4% in 2025 and 4.5% in 2026, up from his expectations of 0.6% growth in 2024 — “as long as we don’t see farther escalations revive themselves.”
Hundreds of people gather in Israel demonstrated demanding the immediate return of hostages to their homes after the ceasefire came into effect, on January 18, 2025 in Tel Aviv, Israel.
Nir Keidar | Anadolu | Getty Images
“I hope the ceasefire is a turning point away from the 7th of October [2023], that horrible 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 to regional arrangements that, you know, facilitate rehabilitation and, importantly, sustainable security. That will provide economic growth, that 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 U.S. is currently in its first phase, which is set to last 42 days and will see Hamas release 33 Israeli captives taken during the Oct. 7 2023 attacks, in return for at least 1,700 Palestinians currently jailed in Israel.
During this stage, bolstered humanitarian aid will be deployed to all parts of the Gaza Strip, while hospitals and health centers will be rehabilitated, and critical fuel supplies will make their way into the enclave.
Israel spent approximately 100 billion shekels ($28 billion) on military conflicts in 2024, its finance ministry announced Tuesday, which has sharply increased government borrowing and debt. The country’s debt-to-GDP ratio rose from 61.3% in 2023 to 69% by the end of 2024.
In September, Moody’s downgraded Israel’s credit rating two notches from “A2” to “Baa1”, keeping its outlook at “negative” at the time. It based its move on the escalating conflict between Israel and the Lebanese militant group Hezbollah. The warring parties forged a ceasefire deal in November.
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