Bank of Israel Rate Decision Near Election: Historical Precedent

The Bank of Israel is set to announce its latest interest rate decision on Wednesday at 4:00 PM, just six days before the upcoming Knesset elections. While the market consensus anticipates the rate will remain at 3.25%, despite a lower-than-expected September inflation report, the timing raises questions about potential political considerations. A rate cut could ease financial burdens for mortgage holders and businesses, potentially leading to a rate decision being interpreted politically, even if based on professional judgment.

However, historical data suggests the Bank of Israel has not always refrained from making rate changes close to elections. For instance, on March 27, 2006, the day before the 17th Knesset elections, then-Governor Stanley Fischer announced a quarter-point rate hike to 5%, effective in April. This decision was made before the vote, though its implementation was post-election, indicating that the announcement date, not just the effective date, is relevant for historical comparison.

Examining rate decisions preceding 12 elections since 1999 reveals that rates were changed in seven instances: five cuts and two hikes, with five remaining unchanged. Notable examples include a rate cut in January 2001, another in January 2009 during the global financial crisis, a reduction in December 2012, and a historic low set by Governor Karnit Flug in February 2015 with a cut to 0.1%. Conversely, in October 2022, a 0.75% rate hike to 2.75% occurred less than a month before elections, aimed at combating inflation.

In five of the 12 election periods analyzed, the interest rate remained unchanged. However, in four of these cases between 2019 and 2021, the rate was already at a very low 0.25% or 0.1%, limiting the scope for further reductions and making it difficult to attribute the lack of change solely to election proximity. A more telling case was in January 2003, when the day before elections, the Bank kept the rate at 8.9%, citing political uncertainty, deficit risks, and the need for post-election fiscal adjustments.

Despite the lower-than-expected September inflation in Israel, which fell by 0.5% against forecasts of 0.3%-0.4%, and a year-on-year inflation rate of 1.6%, the Bank of Israel faces a complex decision. While this data supports a potential cut, the Monetary Committee must also consider service prices, future expectations, and the possibility that the current slowdown is temporary. Furthermore, global inflation trends, particularly the rise in US inflation to 3.7% in September, add a layer of complexity, potentially influencing the Federal Reserve's own rate policies and impacting the relative attractiveness of shekel investments.

Analysts like Alex Zabezhinsky from Meitav note that Israel has experienced consistently low inflation compared to other developed nations for years, attributing this to factors like a strengthening shekel, increased online foreign purchasing, greater competition, and natural gas development. Despite this, Israeli interest rates have often been higher than in countries with similar low inflation. While Meitav anticipates rate cuts in the coming months, reaching 3% and then 2.75%-3% within a year, other forecasts, such as from Leader, suggest the rate might stay at 3.25% until the end of 2027. The Bank of Israel's upcoming updated macroeconomic forecast will offer further clues.