Israel Delivers First Rate Cut in Nearly Two Years

The Bank of Israel cut its benchmark rate by 25 bps to 4% in January, marking a second consecutive cut at successive meetings. Headline inflation eased to a four-year low of 2.4% in November 2025, staying within the government’s 1%–3% target range for the fourth straight month, with expectations anchored near the midpoint. Economic activity continues to expand, supported by credit card spending, exports, and high-tech fundraising, while the risk premium remains close to pre-war levels. Labor market tightness has eased, with higher participation and employment rates and lower reserve-duty absenteeism. The shekel strengthened sharply against the US dollar and euro, lifting the nominal effective exchange rate. The Research Department forecasts GDP growth of 5.2% in 2026 and 4.3% in 2027, with inflation easing to 1.7% and 2%, respectively. Policymakers flagged risks from geopolitical uncertainty, potential price pressures from rising demand, and fiscal developments.

The Bank of Israel cut its benchmark interest rate by 25 bps to 4.25% at its November meeting, marking the first reduction in nearly two years, as expected. Policymakers cited moderating inflation but emphasized caution regarding further easing. The move comes as major central banks worldwide have already begun loosening monetary policy and as last month’s US-brokered truce between Israel and Hamas holds. Annual inflation stood at 2.5% in October, within the official 1–3% target range for the third straight month. Forecasters expect a modest pickup toward year-end before inflation declines and stabilizes near the midpoint of the range. Economic activity rebounded sharply in Q3, with GDP expanding at an annualized 12.4%, though output remains below its long-term trend. The labor market also remains tight.

The Bank of Israel kept its benchmark interest rate unchanged at 4.5% for the 14th consecutive meeting on September 29, in line with market expectations. Policymakers cited elevated geopolitical uncertainty, as the ongoing Gaza conflict and deteriorating international sentiment continue to weigh on economic activity and investment. Annual inflation eased to 2.9% in August, marking a one-year low and returning to the government’s 1-3% target range. The labor market remains tight, partly due to reserve mobilization and shortages of non-Israeli workers. Meanwhile, economic activity is gradually recovering, supported by consumer spending, investment, and construction, although several indicators remain below pre-conflict levels. Elevated defense spending and a stronger shekel also influence the economy. Looking ahead, the central bank indicated that future rate decisions will balance inflation, economic growth, financial stability, and fiscal considerations amid ongoing geopolitical risks.