Israel Pauses Interest Rate Cuts Ahead of Crucial Election

Israel held interest rates steady after three consecutive cuts, just six days before the country faces one of its most consequential elections.

The Bank of Israel held its base rate at 3.25% on Wednesday, in line with the unanimous projection of 16 economists surveyed by Bloomberg.

The central bank also said Israel is on track to exceed earlier growth forecasts and now expects the economy to expand 5.6% this year. The figure is more than a percentage point higher than the International Monetary Fund’s own projection of 4.5% growth this year — the highest among the Organisation for Economic Co-operation and Development’s members.

Pressure for further cuts eased since policymakers last revised interest rates, with inflation slowing more than expected to 1.6% and the shekel easing against the dollar.

“The fact that the shekel has moved further away from peak strength, the flare-up of geopolitical risk in the region — albeit with Israel not at the center of it this time — and elections just a week after the interest rate decision, make it difficult to see why the BOI would want to rush into another rate reduction,” Citibank economist Michel Nies said ahead of the decision.

The backdrop for the latest rate decision is Israel’s election, widely considered a de facto referendum on the country’s longest-serving prime minister, Benjamin Netanyahu. Tuesday’s election will be the first since Hamas militants attacked Israel three years ago.

Recent polls show the race is tight, with neither Netanyahu’s right-wing bloc nor the opposition under Gadi Eisenkot reaching the 61 parliamentary seats needed to form a government.

The central bank, like investors, businesses and rating agencies, is watching whether the next government will adopt fiscal policies that can meet soaring defense needs while supporting growth, reversing a growing brain drain and rebuilding ties with Western economies.

“The big challenge for any new government will involve a fiscal trilemma: narrowing debt, managing defense expenditure, and investing in growth engines,” Bank of Israel Governor Amir Yaron told Bloomberg TV in August. “This includes integrating ultra-Orthodox men into the labor force and military service; political issues with huge economic ramifications.”