Bank of Israel Holds Interest Rate Steady After Three Cuts
Translated & summarized from Ynet by baba
The Bank of Israel decided to keep its benchmark interest rate unchanged at 3.25%, halting a streak of three consecutive cuts. The decision, which aligns with economic forecasts, was made despite low inflation, citing political uncertainty, defense spending, and geopolitical tensions. The bank also projected a budget deficit of 4.4% for 2026 and anticipates inflation to reach 2% by late 2027. The next interest rate decision is due on November 23.
The story in 5 lines · by baba
- Bank of Israel holds interest rate at 3.25% after three prior reductions.
- Analysts cited political uncertainty and defense spending as reasons for the pause.
- Inflation remains low at 1.6%, below the government's target range.
- The bank forecasts a budget deficit of 4.4% for 2026.
- The next interest rate decision is scheduled for November 23.
The Bank of Israel announced on Wednesday that it would maintain the benchmark interest rate at 3.25%, pausing a series of three consecutive reductions. This decision aligns with the majority of economic forecasts from analysts at banks and investment firms. The prime lending rate will remain at 4.75%. The next interest rate announcement is scheduled for November 23.
The decision to halt the rate cuts came despite a persistently low inflation environment. Consumer prices fell by 0.5% in September, and the annual inflation rate stands at 1.6%, which is below the government's target range of 1% to 3% for price stability.
Analysts had anticipated the pause, citing several factors including political uncertainty ahead of next week's elections and the formation of a new government, elevated defense spending, renewed tensions with Iran, and a strengthening dollar, which an additional rate cut could further encourage.
The Bank of Israel also released its updated economic forecast, projecting only one further interest rate reduction to 3% in the coming year. This forecast assumes that the intensity of combat operations will remain low and the geopolitical environment will stay tense, without accounting for potential impacts of the upcoming election results on the economy. The bank highlighted significant uncertainty regarding various economic parameters.
Looking ahead, the bank anticipates inflation to reach 2% by the third quarter of 2027, after decreasing to 1.5% by the end of the current year, partly due to fuel tax reductions. The forecast for inflation and interest rates is consistent with financial market expectations and private forecasters' averages.
The state budget deficit is projected at 4.4% of GDP in 2026, a decrease from July's forecast due to revised revenue expectations. It is expected to rise to 4.6% in 2027, driven by increased defense expenditures. The debt-to-GDP ratio is forecast to be 68.0% in 2026 and 66.5% in 2027, lower than previous projections.
The Bank of Israel is now focusing on GDP excluding offshore production, which it believes better reflects domestic economic activity. Offshore production, generated by Israeli companies abroad, is expected to grow significantly. GDP including offshore production is projected to grow by 5.6% this year and 7.5% in 2027.
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