The Bank of Israel decided on Monday to lower its benchmark interest rate by 0.25 percentage points to 4.5%, in the first such cut since April 2022.

“The war is having significant economic consequences, both on real economic activity and on the financial markets. There is a great amount of uncertainty with regard to the expected severity and duration of the war, which is in turn affecting the extent of the impact on activity,” said the bank in a statement.

“The pace of inflation continues to decline … [and] expectations from various sources are that inflation will enter the target range [of 1% to 3%] in the first quarter of the year,” it added.

In October, the central bank’s Monetary Committee decided to leave its key interest rate unchanged at 4.75%. The same held true in July, the first time the bank had left the rate unchanged following 10 consecutive hikes geared towards curbing inflation.

According to the bank, there has been a sharp recovery in several economic spheres following the declines at the beginning of the war. Since the previous interest rate decision, the shekel strengthened by 2.7% against the U.S. dollar and 1.7% against the euro.

Moreover, the bank on Monday forecasted that GDP would grow by 2% in 2024 and 5% in 2025.

“Israel’s economy has strong foundations, and the economic starting point with which we entered the war was positive,” said BOI Governor Professor Amir Yaron on Monday.

“The debt-to-GDP ratio, one of the most important indicators of the economy’s resilience, had declined back to approximately 60%, the expected deficit in the budget was low, the unemployment rate was low, and the growth forecast was encouraging, certainly from an international perspective,” he added.