- Decision
- Maintain
- Rate change
- 0 bps
- interest rate
- 4.5%
Bank of Israel’s Monetary Committee kept the policy rate at 4.5 percent at its 29 September meeting, citing intensified Gaza hostilities and deteriorating international sentiment that heighten uncertainty even as 12-month inflation slipped to 2.9 percent—still at the upper edge of the 1–3 percent target and expected to hover around or slightly above it before easing in early 2026. The rate has been unchanged at 4.5 percent since January 2025. Staff now forecast GDP growth of 2.5 percent in 2025 and 4.7 percent in 2026, with inflation seen at 3.0 percent and 2.2 percent respectively; economic activity is recovering from the Iran-related contraction, but the labour market remains tight owing to reserve mobilisation and a shortage of non-Israeli workers, while robust building starts contrast with falling housing transactions and cooling home-price gains. Since the August decision the shekel has appreciated about 1 percent against the USD and 1.2 percent in nominal effective terms, Israel’s risk premium is stable yet above pre-war levels, and the goods-and-services surplus fell sharply in Q2 amid weaker exports before a recent rebound. Globally, conditions are mixed—U.S. growth has softened, the euro-area and China are improving, the global growth forecast has inched higher, and world trade momentum is slowing—while the Federal Reserve cut rates by 25 bp and the ECB stayed on hold. Looking ahead, the Committee stressed that the rate path will hinge on inflation’s convergence to target, financial-market stability, domestic activity and fiscal policy amid persistent 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.