- Decision
- Maintain
- Rate change
- 0 bps
- interest rate
- 4.5%
The Bank of Israel’s Monetary Committee on 26 May 2025 left the policy interest rate at 4.5 percent, judging a steady hand appropriate as economic activity edges upward but 12-month inflation has risen to 3.6 percent—above the 1–3 percent target range—and forecasters now see a slower return to target. The hold extends an unchanged stance at 4.5 percent maintained since January. First-quarter GDP grew 3.4 percent (annualised), yet output remains roughly 4 percent below its long-run trend; the labour market is still tight but vacancies and the unemployment-to-vacancy ratio have eased, and broad unemployment ticked up to 3.4 percent in April. One-year inflation expectations sit near the midpoint of the target, while housing-market activity has softened and Israel’s risk premium has retreated with volatility but is still above pre-war levels. The shekel has appreciated about 4.5 percent against the USD and 2.3 percent on a nominal effective basis since the previous decision, even as global growth signals are mixed and external risks from geopolitics, supply constraints and terms-of-trade shifts persist. The Committee reiterated that the future rate path will hinge on inflation’s convergence, financial-market stability, economic performance and fiscal policy.
Rate evolution
From July 2025 to September 2026, the Bank of Israel reduced the interest rate by 125 basis points to 3.25 percent, after holding at 4.5 percent through September, cutting twice as disinflation became more established, pausing at 4.0 percent amid renewed conflict, and then resuming easing. The early holds reflected inflation still above or near the top of the target range, high inflation volatility, a tight labor market, and only moderate recovery in activity, all against high geopolitical uncertainty, with the Committee repeatedly citing risks from geopolitical developments, demand rising alongside supply constraints, worsening global terms of trade, and later fiscal developments. As inflation moved into the target range, expectations stayed around the midpoint, the shekel appreciated, and Israel’s risk premium declined, the Committee cut in November and January even as it noted a sharp rebound in activity, persistent labor tightness, and firm wage growth.
In the subsequent decisions, the Committee held in February and March as uncertainty around Iran resurfaced, energy prices lifted the inflation environment, and housing and labor supply pressures remained evident, then cut in May and July as inflation stayed around the midpoint, risk premia returned near prewar levels, and activity recovered after Operation Roaring Lion. The July decision also reflected lower energy prices and more moderate global geopolitical tension following the memorandum of understanding signed between the United States and Iran, even as the shekel had depreciated with high volatility, the labor market remained tight, wage growth was rapid, and housing inflation picked up. On September 1, the Committee cut by a further 25 basis points as inflation moderated below the midpoint, while noting that growth partly reflected recovery from Operation Roaring Lion, activity excluding production abroad by Israeli firms was more moderate, the labor market remained tight, and geopolitical uncertainty remained high, and reiterated that future moves would depend on inflation, economic activity, geopolitical uncertainty, and fiscal developments.