The Bank of Israel opted on Monday to maintain its benchmark short-term rate at 4%, holding steady for a second month in a row. The move was widely anticipated and the central bank explicitly pointed to inflationary pressure stemming from the Iran war, which has pushed up oil and energy costs.
In its policy statement the central bank noted that geopolitical uncertainty has increased since the outbreak of the conflict a month ago - both domestically and internationally - with questions remaining about the likely duration and intensity of the fighting and how it will conclude. It said that, since the prior decision, inflationary conditions have strengthened largely because of a pronounced increase in global energy prices.
The central bank also recalled that it had reduced rates in November and January after a ceasefire in Gaza, but left rates unchanged last month, resulting in the current 4% benchmark. Monthly policy continuity follows earlier easing moves and reflects the bank's assessment of the evolving inflation picture and external risks.
On the inflation data front, Israel's annual inflation rate rose to 2.0% in February, up from 1.8% in January. That level remains within the official target band of 1-3%.
All 13 economists polled had forecast no change in the policy rate, citing U.S. and Israeli strikes launched on February 28 that have led Iran to largely shut the Strait of Hormuz - a development the central bank highlighted as a contributor to the recent energy price increases.
In addition to holding rates, the Bank of Israel adjusted its economic outlook. Its staff lowered the 2026 growth forecast for Israel to 3.8% from a prior 5.2%, while lifting the 2027 estimate to 5.5% from 4.3%. The bank projects that by the first quarter of 2027 the policy rate will be 3.5% to 3.75%, effectively implying two reductions of 25 basis points each, and expects inflation to be running at a 2.3% rate at that time.
The central bank's statement linked the recent uptick in inflation mainly to higher global energy prices rather than domestic demand pressures. As geopolitical developments continue to influence energy markets, the bank's near-term path for policy remains contingent on how those external factors evolve.