- Decision
- Maintain
- Rate change
- 0 bps
- interest rate
- 4.5%
The Bank of Israel’s Monetary Committee kept its policy rate at 4.50 percent on 20 August 2025, judging that the recent dip in annual inflation to 3.1 percent—now only slightly above the 1–3 percent target band—combined with a fragile post-conflict rebound in activity and persistent geopolitical uncertainty warranted no change. The rate has been unchanged at 4.50 percent since at least January 2025. While Q2 GDP contracted 3.5 percent owing to June’s military operation against Iran, the committee stressed that underlying growth remained positive albeit below potential, and July indicators—credit-card spending and business surveys—show a rapid return to pre-operation levels; the labour market is again tight, with broad unemployment at 3.5 percent. Home prices have fallen for four consecutive months, cutting the year-on-year rise to 2.5 percent, and inflation expectations for one year ahead sit near the target midpoint. Externally, the shekel has weakened 1.3 percent against the USD since the last decision and the five-year CDS spread, though off its recent highs, is still above pre-Gaza-war readings. Against a backdrop of moderate global growth and steady policy rates abroad, the committee repeated that the future rate path will hinge on inflation’s convergence to target, financial-market stability, domestic activity and fiscal policy amid elevated geopolitical risks.
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.