Bank of Israel again declines to lower interest rates, citing war uncertainty, Iran fallout

The Bank of Israel decides to leave interest rates steady at 4.5%, amid a “high level of geopolitical uncertainty,” and after the war with Iran took a toll on the economy.

“Geopolitical uncertainty is high, and there is a wide variety of possible security developments,” the central bank says. “Economic activity is recovering following a marked decline during the military operation against Iran.”

But if the ongoing multifront war “becomes more intense and more drawn out, there are risks that the supply restrictions may continue to weigh upon the recovery of economic activity, growth may be more moderate, and the budget deficit and inflation may be higher,” the Bank of Israel cautions.

Ahead of the interest rate decision, the majority of economists were in consensus that the central bank would take a wait-and-see approach about consumer prices continuing to moderate before lowering the base lending rate. Israeli inflation in July retreated to 3.1%, down from 3.3% in June. However, it is still above the government’s annual target range of between 1% and 3%.

“Inflation in recent months has been characterized by high volatility,” the Bank of Israel notes. “There are several risks for a possible acceleration of inflation or for it not converging to the target range: geopolitical developments and their impact on economic activity, an increase in demand alongside supply constraints, and worsening global terms of trade.”

The 22-month war has taken a toll on the economy. In the April to June quarter the economy contracted, with gross domestic product shrinking 3.5% as the 12-day war with Iran in June led to a shutdown of many businesses and hurt consumer spending, exports and investment.

The central bank last lowered interest rates in January 2024, the first cut in almost four years, to support households and businesses as the economy was getting battered by the war with the Hamas terror group.