Bank of Israel Holds at 3.25% as Overseas Production Lifts Its Growth Forecast

Israel enters November with its benchmark interest rate at 3.25%, following the Bank of Israel's October 21 decision to leave it unchanged. The bank expects stronger economic growth, but a significant part of the headline expansion comes from Israeli companies' production overseas. Its forecast therefore gives a separate measure of activity excluding that production, offering a clearer view of the recovery taking place inside Israel.

The decision now carrying into November

The Monetary Committee held the rate despite annual inflation falling to 1.6% in September, below the midpoint of its target range. In the October announcement, it cited continuing geopolitical uncertainty alongside expanding economic activity. Minutes of the discussions are scheduled for November 4, with the next rate decision due on November 23, according to the bank's published timetable.

That leaves households and businesses operating under the existing policy setting while the committee receives further data. A policy hold does not fix every bank's lending or deposit offer: commercial pricing also reflects the product, term and borrower. The immediate decision was to maintain the central bank rate, with future moves tied to inflation, activity, fiscal developments and geopolitical conditions.

Two growth figures describe different activity

The October 21 staff forecast projects total GDP growth of 5.6% in 2026 and 7.5% in 2027. Excluding production abroad, the corresponding forecasts are 3.4% and 5.1%. The bank says the latter measure better captures domestic economic activity, because overseas production by Israeli companies is making a large contribution to the headline figures.

The gap has practical significance for interpreting the technology economy. A company can expand its international production while local employers still struggle to recruit. Stronger national output figures can therefore coexist with constraints in Israeli workplaces. The bank's presentation allows the international contribution and the domestic recovery to be assessed together, without assuming that every additional unit of output creates the same demand for labor inside Israel.

The recovery has identifiable drivers

A separate Bank of Israel release on October 21 put September's monthly economic activity index increase at 0.3%. The measure reflects estimated average monthly growth over July through September. The bank linked its improvement to credit card spending, manufacturing exports, stock market indices, retail trade and receipts from other services, with individual components referring to August or September according to their reporting schedules.

Employment and vacancy figures for August, together with September indirect tax receipts, moderated the increase. Recent readings were also revised downward as final data arrived. The combination points to an economy continuing to expand, with uneven contributions across its components. It also explains why one strong company announcement cannot stand in for the broader activity picture.

Labor supply remains part of the constraint

In his October 21 briefing, Governor Amir Yaron described a resilient economy whose recovery still faced supply constraints. The staff forecast assumes that fighting remains at a relatively low intensity and that the geopolitical environment stays tense. Those assumptions allow some easing of supply pressures while leaving the recovery exposed to developments outside the central bank's control.

The research department expects domestic output to remain below its prewar trend even at the end of 2027, partly because labor supply is expected to remain below the level implied by prewar participation rates. Its projections also exclude the potential economic effects of the Israeli election. Businesses planning recruitment or production capacity consequently face a forecast built around explicit conditions, with room for substantial revision if those conditions change.

Inflation offers relief, with risks still present

The research department forecasts inflation of 2.0% over the four quarters ending in the third quarter of 2027 and an average policy rate of 3.0% during that quarter. These are staff projections, while the Monetary Committee retains responsibility for each rate decision. The forecast's lower future rate can coexist with the committee's choice to wait in October.

Yaron identified energy prices, exchange rates, supply pressures and fiscal policy among the forces that could shape inflation. His briefing also noted stronger inflation pressures abroad. For an economy importing energy and goods while selling into international markets, those channels can affect costs even when domestic inflation has moderated.

What the next publications can clarify

The November 4 minutes will add detail about the discussion behind the October hold. The November 23 decision will be made against a later information set. Between those dates, the central issue remains the balance already visible in the bank's releases: continued recovery, a larger international production contribution, and domestic capacity that is still constrained.

For readers following Israeli business, the useful comparison is between the total GDP forecast and the domestic activity measure alongside it. The first captures a wider economic contribution; the second helps explain conditions facing employers, workers and consumers within Israel.