Israel Slashes Key Policy Rate to 3.5% as Forecast

The Bank of Israel lowered its policy rate by 25 bps to 3.50% at its July 2026 meeting, as anticipated, delivering a second straight rate cut and bringing the policy rate to its lowest level since 2022. memorandum of understanding between the US and Iran. Policymakers noted that inflation remained around the midpoint of the target range in May, while Israel's risk premium returned to pre-October 2023 levels. Annual inflation held at 1.9% for a third straight month in May, remaining well within the Bank of Israel's 1%–3% target range. Governor Amir Yaron said forecasts show inflation easing to around the midpoint of the target range over the next year, allowing for further policy easing. Meanwhile, the central bank added that recent indicators point to a continued economic recovery following the slowdown at the start of the conflict with Iran, with GDP projected to grow 4.0% in 2026 and 5.5% in 2027.

The Bank of Israel cut its benchmark interest rate by 25 bps to 3.75% during its May 2026 meeting, as widely anticipated, after keeping it unchanged in February and January. The decision was driven by a strong shekel, contained inflation, and prospects of a potential agreement to end the war with Iran, despite still significant geopolitical uncertainty. The central bank noted that “inflation in Israel remains around the midpoint of the target.” The headline inflation stood at 1.9% in April 2026, unchanged from March and staying within the Bank of Israel’s 1%–3% target band for nine consecutive months. Meanwhile, policymakers noted that GDP contracted 3.3% at an annual rate in Q1, reflecting the impact of Operation Roaring Lion, but the decline was smaller than expected and less severe than during Operation Rising Lion in June 2025. Current indicators of economic activity point to a recovery. The central bank said future rates will be guided by both domestic and external factors.

The central bank of Israel left the key interest rate steady at 4% in its March 2026 meeting, in line with expectations, noting that there has been an increase in the inflation environment, mainly due to a marked increase in global energy prices. Policymakers also said that since the beginning of Operation “Roaring Lion”, geopolitical uncertainty has grown both domestically and globally, particularly with regard to the expected duration and intensity of the fighting and how it will end. The central bank revised its economic forecasts, with the baseline scenario assuming that Operation Roaring Lion and the fighting in Lebanon will end toward the end of April, and the direct economic impact of the military operation will remain as long as the fighting continues. GDP is expected to grow by 3.8% in 2026 and by 5.5% in 2027, compared with 5.2% and 4.3%, respectively, in the January forecast. The inflation rate is expected to be 2.2% in 2026 and 1.8% in 2027.