By Steven Scheer
JERUSALEM, Oct 21 (Reuters) – The Bank of Israel left short-term interest rates unchanged at 3.25% on Wednesday, opting to hold ahead of the country’s election next week and amid sustained geopolitical tensions.
It had cut rates in 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.
All 15 economists polled by Reuters had expected no move.
While the bank’s own economists maintained an estimate of one more cut to 3.0% in the coming year, Bank of Israel Governor Amir Yaron was non-committal over future monetary easing during a news conference, citing factors including a tight labour market.
He rejected the notion of holding fire due to Tuesday’s vote, saying the decision was solely based on economic factors.
“The decision to keep the interest rate unchanged is the right one. It is the responsible choice, especially in light of three consecutive rate cuts, and given the various global and domestic risks,” Yaron said.
“The Israeli economy continues to operate in an environment characterised by high geopolitical and fiscal uncertainty.”
Yaron noted the trend of rising rates in the US and Europe, but said that in Israel the “full effects of the monetary policy measures we have already taken have not yet been fully reflected in the economy, and at this stage it is appropriate to continue monitoring their cumulative impact”.
The annual inflation rate edged up to 1.6% in September — within the bank’s 1% to 3% target range — from 1.5% in August. It is forecast to reach 2% in a year’s time.
Yaron said the geopolitical uncertainty made “it all the more important to preserve adequate fiscal policy space.”
The Bank of Israel stayed largely on hold for much of the Gaza war between October 2023 and October 2025 due to supply side constraints that pushed inflation higher.
According to the bank’s research department’s staff forecast, the economy is expected to grow by 5.6% in 2026 and by 7.5% in 2027. Much of the revision reflects the large expected contribution of production abroad by Israeli firms, which may create a distorted picture of the pace of real domestic economic activity, the bank said.
Excluding production abroad, growth was forecast at 3.4% in 2026 and 5.1% in 2027.
Yaron said while production abroad contributed to tax revenue, “it does not utilise domestic capital or labour, and most of the income it generates does not accrue to Israeli households”.
Growth was an annualised 15.4% in the second quarter and Yaron said third-quarter data indicated continued growth.
The shekel was flat at 3.09 per dollar after weakening 3% since the previous rates decision on September 1.
(Reporting by Steven Scheer; Editing by Toby Chopra and Alison Williams)
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