- Decision
- Lower
- Rate change
- 25 bps
- Interest rate
- 4%
The Bank of Israel Monetary Committee cut the policy rate by 25 bp to 4.00 % on 5 January 2026, arguing that the inflation environment has moderated—November CPI fell 0.5 % and annual inflation eased to 2.4 %—while labour-supply constraints are easing and activity continues to expand. After keeping the rate at 4.50 % through September and trimming it to 4.25 % in November, today’s move extends the easing cycle. Annual GDP growth is estimated at 2.8 % for 2025 and projected to accelerate to 5.2 % in 2026, with inflation seen dipping to around the midpoint of the target band next year despite a brief uptick expected in December; one-year inflation expectations sit just below that midpoint. The shekel has gained 3.1 % against the USD since the previous decision and Israel’s CDS spread is back near pre-war levels. Global growth is still forecast at about 3 % in 2025 amid gradually receding worldwide inflation, helped by lower energy prices. The Committee reiterated that the future rate path will depend on inflation dynamics, domestic activity, geopolitical risks and fiscal developments, noting potential upside risks to prices from renewed tensions, demand pressures 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.