The Governor of the Bank of Israel signaled that the newly approved 2026 state budget and its widening fiscal deficit could delay planned interest rate cuts. The central bank kept its benchmark rate at 4 percent, a move widely expected, but Governor Amir Yaron criticized the way the budget was formulated and said the bank had little influence over its final shape.

The budget sets a deficit target of 4.9 percent of gross domestic product, alongside additional spending including 800 million shekels for the ultra orthodox education system. Shortly after the budget was passed, the Ministry of Finance lowered its economic growth forecast due to the ongoing war with Iran, a revision that could further widen the deficit because it reduces expected tax revenues. The central bank estimates the deficit could reach 5.3 percent under the weaker growth outlook.

Yaron said that if the updated growth data had been available to decision makers, the deficit target should have been adjusted or further budget cuts made. While he emphasized that the bank had influenced fiscal policy in previous years, he acknowledged that in the final stages of the 2026 budget process it had minimal impact.

The central bank now expects inflation of 2.2 percent this year and sees interest rates falling more slowly than previously projected, with one or two cuts over the coming year. Yaron stressed that future rate decisions will depend on the course of the war, inflation trends, and financial market stability, warning that higher deficits and debt levels could weigh on the pace of monetary easing.