The Bank of Israel kept the policy rate at 3.25% on Wednesday, pausing after three reductions and landing exactly where all 16 economists polled by Bloomberg expected. Officials noted that inflation had decelerated more than expected to 1.6%, while the shekel weakened versus the dollar, reducing the urgency for further cuts since the previous move.
Policymakers projected a 12-month forward rate of 3%, which signals room for a single further cut in the coming year. Nisan Avraham, from the Tel Aviv Stock Exchange's research team, put it this way: "The Bank of Israel is slowing, rather than ending, its rate-cutting cycle." He added that while subdued domestic inflation supports more easing, global and local uncertainties call for caution.
The central bank now sees the economy expanding 5.6% this year, up from a prior 4% estimate, and forecasts 7.5% growth next year. That 5.6% call runs more than a percentage point above the International Monetary Fund's 4.5% view for Israel this year, which the IMF ranks as the fastest among OECD members.
What is powering the upgrade? A bigger lift from tech firms through what the bank calls "production abroad" - goods made outside Israel and shipped straight to customers, like chips.
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The decision landed six days before Israel's election, widely viewed as a referendum on Benjamin Netanyahu, the country's longest-serving prime minister. Polls point to a tight race, with Netanyahu's right-wing bloc and the opposition led by Gadi Eisenkot both falling short of the 61 seats needed to form a government. It will be the first vote held in the three years since Hamas militants attacked Israel.
Forecast assumptions include low-intensity fighting amid a tense geopolitical backdrop. Israel has been involved in intermittent hostilities in Gaza, Lebanon, Iran and Syria since that attack. Yaron noted, "The forecast does not incorporate possible fiscal legislation measures that may be adopted by the government formed after the elections." Like investors, businesses and rating agencies, the bank is watching whether the next government balances soaring defense needs with growth, addresses a growing brain drain, and repairs ties with Western economies. As Yaron said in August, the next cabinet confronts a fiscal trilemma - cutting debt, funding defense, and backing growth drivers - one piece of that is increasing participation by ultra-Orthodox men in the labor force and in military service.
For markets, the mix is unusual: faster headline growth, potential for one more rate cut, and a big slice of momentum from activity that pads tax revenue without using local labor or capital. The bottom line: watch how the election steers fiscal choices and how much of the reported expansion shows up in on-the-ground demand in Israel versus tech output booked from abroad.
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