Bank of Israel Keeps Key Rate Unchanged at 4%

The Bank of Israel kept its benchmark interest rate unchanged at 4% in February 2026, following two consecutive rate cuts. Although inflation has moderated and the shekel has strengthened, the Central Bank highlights risks of a renewed increase of inflation. Geopolitical uncertainty has increased in recent days, particularly surrounding the possibility of a US strike on Iran, which could weigh on economic activity. Additional inflationary pressures may stem from strong domestic demand, ongoing supply constraints, and fiscal developments. However, inflation remains within the central bank’s target range, easing to 1.8% in January, marking its lowest level since June 2021 and close to the midpoint of the target range. The shekel appreciated modestly against both the US dollar and the euro. Meanwhile, economic activity continues to expand, with the latest quarterly growth rate accelerating to 4.4%. The labor market also remains tight.

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.