By Steven Scheer
JERUSALEM, Feb 23 (Reuters) – The Bank of Israel held short-term interest rates steady on Monday after two successive cuts, citing fears about the impact of a U.S. strike on Iran which overshadowed easing inflation pressures and a strong shekel.
After reductions in November and January, the central bank opted to leave its benchmark rate at 4% despite a U.S.-brokered ceasefire between Israel and Palestinian militant group Hamas that has helped to relieve supply constraints that had pushed up prices during the two-year Gaza war.
“Geopolitical uncertainty has resurfaced in recent days in view of a potential confrontation with Iran, and Israel’s risk premium increased slightly,” the Bank of Israel said in a statement.
Iran and the U.S. are expected to hold further talks this week over Tehran’s nuclear programme in a bid to avert an expected U.S. attack – which could lead to retaliatory strikes on Israel. Iran and Israel fought a 12-day war last June.
Without the overhang of possible U.S.-led strikes on Iran, most analysts had believed the central bank would have reduced its key rate for a third straight meeting due to falling price pressures. Policymakers next meet on rates on March 30.
Israel’s annual inflation rate eased to a 4-1/2-year low of 1.8% in January – well within an official target range of 1-3% – from 2.6% in December.
The central bank has said rates would likely reach 3.5% this year although economists widely see a floor of 3% to 3.25% as long as inflation stays contained.
“In the committee’s assessment, 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 central bank said, also pointing to a tight labour market. Israel has yet to approve a 2026 state budget.
After a 3.1% pace in 2025, the central bank sees 5.2% economic growth in 2026 as the economy rebounds from the Gaza war.
Israel’s Manufacturers’ Association said it was deeply disappointed in the decision given a 15% appreciation in the shekel in the past nine months, adding the central bank is ignoring the “greatest strategic danger currently facing the Israeli economy — the loss of competitiveness of industry and high-tech.”
“Failing to cut the interest rate at this stage means intensifying the pressure on exporters and deepening the damage to productive activity in the economy,” said association president Avraham Novogrotzky. The central bank said it was focused on price and market stability.
Of the 13 economists polled by Reuters, seven had expected a rate cut while six projected no move due to worries over a possible U.S. attack on Iran, which would likely prompt Iranian retaliation on Israel.
“The ordering of considerations, or the reaction function, has in itself not changed,” Citi economist Michel Nies said of Monday’s decision. “Geopolitics still trump the rest – but simply that geopolitical risk was subdued enough to focus on other factors in recent decisions.”
The shekel, which hit a 30-year high against the dollar this month, was flat at a 3.11 rate.
(Reporting by Steven Scheer; Editing by Toby Chopra)
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