Bank of Israel holds interest rates steady a week before election

The benchmark interest rate stayed at 3.25%. This is the rate the Bank of Israel uses as its main signal for monetary policy. Keeping it unchanged means the bank chose not to provide additional interest-rate relief or tighten policy at this meeting.

The pause followed rate cuts in May, July, and September, after earlier cuts in November and January. The bank had previously paused because of the conflict with Iran and fears that supply problems could push inflation higher. All 15 economists polled by Reuters expected no change.

The decision came before next week’s general election, while geopolitical uncertainty remained high. Inflation was 1.6% in September, within the bank’s 1% to 3% target. The bank also noted that the shekel depreciated, adding another factor for policymakers to monitor.

A central bank’s benchmark interest rate is the main rate it sets to guide monetary conditions. It does not directly determine every loan or deposit rate. Instead, it provides a reference point for banks and financial markets when they price borrowing and saving.

When the benchmark rate rises, banks generally face higher funding costs. They often pass those costs to households and businesses through more expensive mortgages, loans, and credit. Higher rates can reduce spending and investment. When the rate falls, borrowing can become cheaper, potentially supporting demand and economic activity.

The Bank of Israel held its benchmark at 3.25%. That choice kept the existing policy setting in place while inflation remained 1.6%, inside the 1% to 3% target. Geopolitical risks and a weaker shekel also influenced the cautious approach.

Annual inflation measures how much consumer prices have changed over a year. The Bank of Israel aims to keep that increase between 1% and 3%. This range gives policymakers room to support the economy while limiting persistent price increases.

Israel’s annual inflation reached 1.6% in September, up from 1.5% in August. It therefore remained 0.6 percentage points above the bottom of the target range and 1.4 points below the top. It was also below the range’s 2% midpoint.

The figure suggests price growth was stable and contained by the bank’s stated objective. Even so, the bank did not cut rates at this meeting. Its decision reflected other risks, including geopolitical tensions, the upcoming election, and the shekel’s depreciation.

An upcoming election can make monetary policy especially sensitive because interest rates affect household budgets, business costs, and economic confidence. A rate cut may be welcomed by borrowers, while a pause or increase may be viewed as cautious. Central banks generally need to protect policy decisions from appearing tied to political timing.

The Bank of Israel held its benchmark rate at 3.25% ahead of Israel’s general election next week. That timing matters because changing rates shortly before voting could attract political attention, even when the decision is based on economic data and risks.

The article does not say the election caused the decision by itself. It says the bank opted to pause ahead of the election while geopolitical tensions remained high. Inflation was 1.6%, within the target range, and all 15 Reuters-polled economists expected no move.

Geopolitical tensions can disrupt production, trade, transport, and supply chains. If supplies become harder or costlier to obtain, prices may rise even when demand is not especially strong. A weaker currency can add to that pressure by making imported goods and inputs more expensive in local-currency terms.

The Bank of Israel said uncertainty remained high because geopolitical tensions were still enflamed. It also reported that the shekel depreciated. Earlier, the bank had paused cuts because of the conflict with Iran and fears of a spike in supply-driven inflation. These facts show why policymakers were watching risks beyond the current inflation rate.

Inflation was still contained at 1.6% in September, within the 1% to 3% target. But further rate cuts could become harder to justify if currency weakness or supply disruptions pushed prices higher. The bank therefore left rates at 3.25%.

The Bank of Israel’s research department expects strong economic growth: 5.6% in 2026 and 7.5% in 2027. These figures are forecasts, not completed results. They indicate the bank expects activity to accelerate across the two years.

Production abroad by Israeli firms makes a major contribution to the projections. Without that contribution, expected growth is 3.4% in 2026 and 5.1% in 2027. Excluding it lowers the forecast by 2.2 percentage points in 2026 and 2.4 points in 2027.

The difference shows how much the headline outlook depends on overseas production. The bank described the revisions upward, but the underlying domestic picture is weaker than the total figures suggest. Policymakers must therefore assess both Israel-linked production abroad and growth excluding that activity.

Interest rates influence how costly it is to borrow and how attractive it is to save. Raising rates usually restrains spending and investment, which can reduce pressure on prices. Cutting rates can support demand and economic activity. Central banks use these effects to guide inflation toward their target.

A bank may pause rate cuts even when inflation is inside its target because current inflation is not the only risk. Supply disruptions, currency depreciation, or geopolitical shocks can raise future prices. Cutting too quickly could add demand or weaken the currency further, making inflation harder to control.

The Bank of Israel faced that balance. September inflation was 1.6%, within its 1% to 3% range, but the bank cited high geopolitical uncertainty and a depreciated shekel. It kept the benchmark at 3.25% after cuts in May, July, and September.