- Decision
- Lower
- Rate change
- 25 bps
- interest rate
- 3.75%
The Bank of Israel’s Monetary Committee cut its policy rate by 25 bp to 3.75 % on 25 May 2026, citing a sharp first-quarter GDP contraction of 3.3 % (annualised) due to Operation Roaring Lion, lingering labour-supply constraints and a recent pick-up in the global inflation environment, even as domestic 12-month CPI remains near the 1-3 % target midpoint at 1.9 %. After keeping the rate at 4 % in March, the central bank has now lowered it from 4.50 % a year ago through a series of 75 bp of cuts since November 2025. The shekel has appreciated by 8.3 % against the USD and 7.4 % on a nominal effective basis since the previous meeting, helping to temper price pressures, while Israel’s risk premium and government-bond spreads have retreated to pre-conflict levels. Credit-card spending has rebounded to slightly above trend, but the economy is still about 4.5 % below its long-term GDP path; broad unemployment fell to 5.9 % in April as reserve-duty absences eased. Housing-related CPI eased to 3.3 % year on year, and home prices are down 1.2 % on the year despite a 0.3 % rise in the latest two-month period. Globally, major central banks held rates steady amid elevated geopolitical risk, while energy-price swings have pushed up worldwide inflation expectations. The Committee reiterated that future policy moves will depend on inflation, economic activity, geopolitical risks and fiscal developments, warning that exchange-rate gains could offset but supply constraints, higher energy prices and fiscal pressures could re-ignite inflation.
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.