Bank of Israel holds interest rates steady a week before election

The Bank of Israel left short-term interest rates unchanged on Wednesday despite stable inflation, opting to pause ahead of the country's general election next week and amid sustained geopolitical tensions.

The central bank, as widely expected, held its benchmark rate ILINR=ECI at 3.25%. It had cut rates last November and January before pausing due to the conflict with Iran and fears of a spike in supply-driven inflation. It then resumed cuts in May, July, and September.

The annual inflation rate edged up to 1.6% in September — well within the bank's 1% to 3% target range — from 1.5% in August.

Uncertainty high as geopolitical tensions remain enflamed

"Uncertainty remains high in view of the geopolitical tensions," the bank said in a statement. "However, during the reviewed period, Israel’s risk premium remained at levels similar to those prior to October 7, 2023, and the shekel depreciated."

All 15 economists polled by Reuters had expected no move.

According to the bank's research department’s staff forecast, GDP is expected to grow by 5.6% in 2026 and by 7.5% in 2027. Much of these upward revisions reflect the large expected contribution of production abroad by Israeli firms, the bank said.

Excluding production abroad, growth was forecast at 3.4% in 2026 and 5.1% in 2027.