ISTANBUL 

Israel's central bank kept its benchmark interest rate unchanged at 4% on Monday, saying it would proceed cautiously as the war with Iran has added to inflationary pressures and heightened uncertainty over the domestic and global economic outlook.

In its latest policy assessment, the bank said geopolitical uncertainty has increased sharply since the start of the Iran war, particularly regarding the likely duration, intensity, and outcome of the fighting.

The bank said the inflation environment has worsened since the previous rate decision, driven mainly by a significant rise in global energy prices, while warning that the conflict is also weighing on global financial stability and market sentiment.

Despite the heightened tensions, the reaction in Israeli financial markets has so far remained relatively moderate, according to the bank. Over the review period, the shekel weakened 0.8% against the US dollar, while strengthening 1.4% versus the euro.

It added that movements in the country’s risk premium, exchange rate, and equity prices have been contained for now.

The military campaign is nonetheless having a broad impact on real economic activity. Credit card purchase data in current prices showed a sharp drop of about 20% at the start of the operation, similar to the decline seen during the previous campaign against Iran, though activity partially recovered after the first two weeks.

The bank also said the labor market remains tight, with wage growth in the business sector accelerating to 4.7% in the November-January period.

The decision came as hostilities in the region have escalated since the US and Israel launched a joint offensive against Iran on Feb. 28, killing more than 1,340 people to date, including then-Supreme Leader Ali Khamenei.

Tehran has retaliated with waves of drone and missile strikes targeting Israel, Jordan, Iraq, and Gulf countries hosting US military assets, inflicting casualties and infrastructure damage while disrupting global markets and aviation.