Bank of Israel cuts growth outlook for this year amid war; interest rates unchanged

The Bank of Israel cuts the growth outlook for the economy for this year as it leaves interest rates on hold for a second straight meeting, citing the growing geopolitical uncertainty over the duration and intensity of the war with Iran.

“The military operation has broad economic implications for real economic activity and there was a marked decline in activity with the outbreak of the confrontation,” the central bank says. “Geopolitical uncertainty has grown both domestically and globally. This is particularly true with regard to the expected duration and intensity of the fighting and how it will end.”

Under the assumption that the war with Iran and the fighting in Lebanon will end toward the end of April, the central bank now expects the economy to grow by 3.8 percent in 2026, down from its January forecast of 5.2% before the outbreak of war with Iran. In 2027, the pace of growth is expected to pick up to 5.5% versus the 4.3% forecasted last time. Israel’s economy grew 2.9% in 2025, overshadowed by the war with the Hamas terror group in ⁠Gaza.

Alongside, the revised growth forecasts, the central bank decides to hold the benchmark interest rate at 4%, in line with forecasts by economists.

“Since the previous interest rate decision, there has been an increase in the inflation environment, mainly due to a marked increase in global energy prices,” the central bank says.

Over the past year, Bank of Israel Governor Amir Yaron has come under fierce criticism by politicians and manufacturers for hesitating to lower high borrowing costs.

In January, the central bank cut borrowing costs by 25 basis points from 4.25% to 4%. In November, it had lowered the benchmark lending rate for the first time in almost two years to 4.25% from 4.5%, following a ceasefire agreement with Hamas.