The Bank of Israel kept its key interest rate steady at 4.5%, reflecting persistent inflationary pressures from the ongoing military conflict. Military mobilization has created labor shortages while reduced airline service has disrupted economic activity, pushing inflation to 3.4%, above the government’s 1-3% target range. The central bank has revised its 2025 growth forecast upward to 4% from 3.8%, though 2024 saw subdued growth of 0.6%. Despite these challenges, recent developments show some economic stabilization. The shekel emerged as the top performer among major currencies in late 2024, while credit default swap prices have declined significantly. However, new fiscal measures, including a 1% VAT increase and higher utility costs, could temporarily boost inflation. The central bank projects rates to remain between 4-4.25% over the next 12 months, with Governor Amir Yaron suggesting monetary easing is unlikely before the second half of 2025. This stance reflects the need to balance market stability with managing the increased government spending required for the war effort.