Bank of Israel holds interest rates steady a week before election

The Bank of Israel maintained its short-term interest rates at 3.25% on Wednesday, despite stable inflation, choosing to hold off on any changes ahead of the upcoming general election and amid ongoing geopolitical tensions. The central bank had previously lowered rates in November and January, then paused due to the conflict with Iran and concerns about rising supply-driven inflation. Rates were subsequently cut again in May, July, and September.

In September, the annual inflation rate rose slightly to 1.6%, still within the bank's target range of 1% to 3%. The bank noted that uncertainty remains high due to the ongoing geopolitical tensions, although Israel's risk premium remained relatively stable compared to pre-October 7, 2023 levels, and the shekel experienced a depreciation.

All 15 economists surveyed by Reuters had anticipated no rate change ahead of the election. The bank's research department projected GDP growth of 5.6% in 2026 and 7.5% in 2027. Much of this optimistic growth forecast is attributed to the significant contribution from production abroad by Israeli firms, according to the bank's analysis. Excluding production abroad, growth is expected to be 3.4% in 2026 and 5.1% in 2027.