By Steven Scheer
JERUSALEM (Reuters) – Israel’s monetary policy committee urged lawmakers to approve the 2025 state budget without further changes to ensure confidence in financial markets, the Bank of Israel said on Monday in the minutes of the Jan. 6 policy meeting.
At the meeting, all five members of the MPC voted to leave the benchmark interest rate at 4.50%, citing expectations of higher inflation in the first half of the year on the heels of tax hikes, war related supply constraints and excess demand. Such price pressures are expected to moderate in the second half of 2025, the minutes said.
Along with an inflation rate which eased to 3.2% in December, staying above the government’s 1%-3% annual target, policymakers have been reluctant to reduce interest rates due to loose fiscal policies – a spike in spending to finance Israel’s military conflicts against Palestinian militant group Hamas in Gaza and Hezbollah in Lebanon since the Hamas attacks on Israel Oct. 7, 2023.
The policy meeting took place before Israel and Hamas agreed to a ceasefire last week that will release Israeli hostages held in Gaza in exchange for Palestinian prisoners held by Israel.
Spending on the war pushed the budget deficit to near 7% of gross domestic product in 2024. The central bank and rating agencies, all of which cut Israel’s credit rating last year, had criticised the government for raising military spending without cutting other areas.
“It is important that the budget framework for 2025 will be approved without additional changes, which will contribute to maintaining the markets’ trust,” the central bank said.
Parliament narrowly approved the 2025 budget in an initial vote last month but still needs to pass two more votes to become law.
The central bank noted that during the budget discussions, several civilian expenditures of a permanent nature were added, and several adjustments of a permanent nature were removed or reduced.
“Against every change in budget items that increases the deficit after 2025, it is important to adopt alternate measures that will prevent the growth of the expected deficits,” the central bank said. “In this way, the economy will be able to converge to a declining path of the debt to GDP ratio from 2026 and onward.”
The bank expects a 4.7% budget deficit and debt to GDP ratio of 69% in 2025. The government has set a goal of 4.4%.
Bank of Israel Governor Amir Yaron on Jan. 6 held out the prospect of rate reductions should price pressures start to ease. “If we see further improvement in the risk premium and inflation surprises for the better we, of course, could … advance this,” he said. “If on the other hand, should inflation remain sticky we would need to continue with restrictive policy.”