Israel Holds Rates Amid Election, Tensions

The Bank of Israel has decided to keep its short-term interest rates unchanged at 3.25%. This decision was made on Wednesday, just ahead of the country's general election and in the context of persistent geopolitical tensions. The central bank had previously implemented several rate cuts in the months leading up to this announcement.

Annual inflation in September was reported at 1.6%, staying within the bank's target range of 1% to 3%. Forecasts suggest inflation will reach 2% within a year. Governor Amir Yaron emphasized the importance of fiscal policy space due to geopolitical uncertainty. He also noted that the full impact of previously enacted monetary policies is still being assessed.

Economists polled by Reuters had anticipated no change in interest rates. While the bank's economists predict one additional cut to 3.0% in the coming year, Governor Yaron remained non-committal, citing a tight labor market and global economic trends like rising rates in the US and Europe. He stated the decision was based solely on economic factors, not the upcoming election.

The bank's research department forecasts substantial economic growth for the coming years, with the economy expected to expand by 5.6% in 2026 and 7.5% in 2027. However, these figures are influenced by significant expected contributions from overseas production by Israeli firms, which may skew the picture of domestic economic activity. Excluding this factor, growth is projected at 3.4% for 2026 and 5.1% for 2027. Governor Yaron clarified that while overseas production boosts tax revenue, it does not utilize domestic capital or labor, and its income generation primarily benefits entities outside Israeli households.