Central Bank Israel Leaves Rates Steady

The central bank of Israel left the key interest rate steady at 4% in its March 2026 meeting, in line with expectations, noting that there has been an increase in the inflation environment, mainly due to a marked increase in global energy prices. Policymakers also said that since the beginning of Operation “Roaring Lion”, geopolitical uncertainty has grown both domestically and globally, particularly with regard to the expected duration and intensity of the fighting and how it will end. The central bank revised its economic forecasts, with the baseline scenario assuming that Operation Roaring Lion and the fighting in Lebanon will end toward the end of April, and the direct economic impact of the military operation will remain as long as the fighting continues. GDP is expected to grow by 3.8% in 2026 and by 5.5% in 2027, compared with 5.2% and 4.3%, respectively, in the January forecast. The inflation rate is expected to be 2.2% in 2026 and 1.8% in 2027.

The Bank of Israel kept its benchmark interest rate unchanged at 4% in February 2026, following two consecutive rate cuts. Although inflation has moderated and the shekel has strengthened, the Central Bank highlights risks of a renewed increase of inflation. Geopolitical uncertainty has increased in recent days, particularly surrounding the possibility of a US strike on Iran, which could weigh on economic activity. Additional inflationary pressures may stem from strong domestic demand, ongoing supply constraints, and fiscal developments. However, inflation remains within the central bank’s target range, easing to 1.8% in January, marking its lowest level since June 2021 and close to the midpoint of the target range. The shekel appreciated modestly against both the US dollar and the euro. Meanwhile, economic activity continues to expand, with the latest quarterly growth rate accelerating to 4.4%. The labor market also remains tight.

The Bank of Israel cut its benchmark rate by 25 bps to 4% in January, marking a second consecutive cut at successive meetings. Headline inflation eased to a four-year low of 2.4% in November 2025, staying within the government’s 1%–3% target range for the fourth straight month, with expectations anchored near the midpoint. Economic activity continues to expand, supported by credit card spending, exports, and high-tech fundraising, while the risk premium remains close to pre-war levels. Labor market tightness has eased, with higher participation and employment rates and lower reserve-duty absenteeism. The shekel strengthened sharply against the US dollar and euro, lifting the nominal effective exchange rate. The Research Department forecasts GDP growth of 5.2% in 2026 and 4.3% in 2027, with inflation easing to 1.7% and 2%, respectively. Policymakers flagged risks from geopolitical uncertainty, potential price pressures from rising demand, and fiscal developments.