Bank of Israel leaves interest rates at 4% despite lower inflation

The Bank of Israel decides to leave interest rates on hold at 4 percent amid rising tensions over potential hostilities with Iran, and despite lower inflation and a strong shekel.

“Geopolitical uncertainty has resurfaced in recent days, in view of a potential confrontation with Iran,” the central bank says in a statement. “There still remain several risks for a renewed increase of inflation: geopolitical developments and their impact on economic activity, an increase in demand alongside supply constraints, and fiscal developments.”

The Israel Manufacturers’ Association calls on the central bank to lower interest rates in light of a strong shekel. The association says the 15% appreciation of the shekel against the dollar over the past nine months is harming exporters’ competitiveness and is damaging the industry and high-tech. Exports make up as much as 40% of economic activity in Israel.

Ahead of the decision, economists were split over whether the central bank would cut interest rates in light of lower inflation and a strong shekel or pause amid heightened geopolitical risks.

Leader Capital Markets chief economist Jonathan Katz said ahead of the decision that he didn’t forecast a change in borrowing costs, citing “rising geopolitical risks due to possible escalation with Iran and very robust growth.” However, looking ahead, Katz expects borrowing costs to be reduced to 3%-3.25% by the end of 2026.

Bucking expectations, the central bank in January cut borrowing costs by 25 basis points from 4.25% to 4%. In its previous rate decision in November, it had reduced the benchmark lending rate for the first time in almost two years to 4.25% from 4.5%, following a ceasefire agreement with the Hamas terror group in Gaza.