Bank of Israel's Election-Eve Rate Decisions: A Historical Perspective

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 widely anticipates the rate will remain at 3.25%, despite a lower-than-expected September inflation index, the timing raises questions about potential political considerations. A rate cut could ease financial burdens for mortgage holders and businesses, potentially leading to political interpretations of a professional decision.

However, historical precedent shows the Bank of Israel has not always waited until after elections to adjust rates. In March 2006, the bank, then led by Stanley Fischer, announced a quarter-point rate hike to 5% the day before elections, with the change taking effect post-election. An analysis of rate decisions preceding 12 elections since 1999 reveals that rates were changed in seven instances: five cuts and two hikes, with rates remaining unchanged in five cases.

Notable pre-election rate adjustments include a 0.3% cut in January 2001, a 0.75% reduction in January 2009 amidst the global financial crisis, a cut to 1.75% in December 2012, and a historic low of 0.1% in February 2015 by Governor Karnit Flug. Conversely, in October 2022, the rate was raised by 0.75% to 2.75% less than a month before elections, as part of inflation control measures.

In five of the 12 election periods examined, rates were not changed, but in four of those (2019-2021), the rate was already at a very low 0.25% or 0.1%, limiting room for cuts. A more significant case was January 2003, when the bank kept the rate at 8.9% the day before elections, citing political uncertainty and deficit risks. This highlights how election-related uncertainty about future government policy can influence economic forecasts and rate considerations, though it doesn't necessarily imply a policy of freezing rates solely for political optics.

Despite Israel's low inflation (1.6% in September), market expectations lean towards the rate remaining unchanged, partly due to global economic conditions. While Israel's September inflation fell 0.5%, below forecasts, the Bank of Israel's Monetary Policy Committee must consider broader trends, service prices, and future expectations. The low inflation in Israel, attributed to factors like a strengthening shekel, online imports, increased competition, and natural gas development, contrasts with relatively higher interest rates compared to other developed nations with similar inflation levels.

Meanwhile, US inflation rose 0.6% in September, with annual inflation accelerating to 3.7%, raising concerns that the Federal Reserve might maintain higher rates for longer. This divergence could impact the shekel's relative attractiveness to investors. The Bank of Israel's September decision saw four out of five committee members favoring a rate cut, with one member preferring to wait due to global developments. While the recent Israeli inflation data supports a cut, the acceleration in US inflation and global uncertainties present a risk. Market forecasts vary, with some predicting the rate to remain at 3.25% until late 2027, while others anticipate a decrease to 2.75%-3% within a year. The Bank of Israel will also release updated macroeconomic forecasts, offering further clues on future policy.