Israel's Interest Rate Hold Linked to Elections, Global Pressures

Bank of Israel's decision to maintain the interest rate at 3.25% is influenced by upcoming elections and global economic factors, according to accountant Majd Karam. Despite declining inflation, Karam explained that the central bank's message is that while interest rates may eventually decrease, the timing of the next reduction is uncertain and likely further out than previously anticipated. The bank has not altered its forecast of the interest rate reaching 3%, but has postponed the timeline for achieving this target due to current economic variables.

Global pressures, including rising energy prices and increased government bond yields, are limiting the Bank of Israel's flexibility in lowering interest rates. Karam noted that Brent crude oil prices have risen by approximately 15% to nearly $110 per barrel, alongside increases in European natural gas prices, fueling concerns about renewed inflationary pressures. International interest rate trends also impact the Israeli central bank's calculations, as a domestic rate cut while other economies tighten monetary policy could widen interest rate differentials and pressure the shekel's exchange rate.

Karam also discussed the influence of major tech companies, particularly Nvidia, on Israel's economic growth projections. He highlighted that the activity of companies registered in Israel, some of which have production facilities abroad, significantly affects overall growth figures. Bank of Israel forecasts a 5.6% economic growth for 2026, but this figure drops to 3.4% when excluding the impact of these multinational corporations. Similarly, 2027 growth is projected at 7.5% with this component, versus 5.1% without it, underscoring the substantial effect of these tech giants on economic outlooks.

Karam cautioned that the elevated contribution of these tech firms to GDP might present a misleading picture of domestic economic activity, as a portion of their production occurs outside Israel. While these companies contribute to state revenues through taxes, an increasing reliance on their foreign-based output complicates the interpretation of growth data. He warned of the risks associated with over-reliance on tech and AI-driven profits, citing uncertainty about the sustainability of current growth in the sector. Sharp fluctuations or declines in the profits of these large companies could have a magnified impact on the Israeli economy as their contribution to GDP and public revenue grows.