Bank of Israel Faces Dilemma Over Interest Rate Cut Before Elections

Israel's Consumer Price Index (CPI) rose by 0.7% in August 2026 compared to July 2026, the Central Bureau of Statistics reported Tuesday. Over the past twelve months, the CPI increased by 1.5%, indicating rising inflation, though slightly lower than economists' expectations. This development has increased the likelihood of an interest rate cut in the Bank of Israel's upcoming decision.

Economists at Psagot Investment House analyzed the recent data, forecasting a 0.5% decrease in the September CPI and a rise to 2.0% inflation. They anticipate a 0.6% increase in the October CPI, pushing inflation to 2.1%. According to Psagot, the current CPI figures theoretically allow the Bank of Israel to continue lowering interest rates.

However, the central bank's next interest rate decision is scheduled for less than a week before national elections. Additionally, the Bank of Israel is awaiting the finalization and details of the 2027 budget, including its composition and projected deficit, to assess its fiscal impact.

Given these factors, Psagot economists believe the Bank of Israel is more likely to postpone further interest rate reductions for several months, at least until the fiscal landscape becomes clearer, despite the latest inflation data. Governor Amir Yaron leads the Bank of Israel.