Bank of Israel cuts policy rate to 4% as inflation moderates and the shekel strengthens

The Bank of Israel published the Governor’s remarks following the Monetary Committee’s decision to lower the policy interest rate to 4 percent, citing a moderation in the inflation environment, further appreciation of the shekel and signs of easing labor-market supply constraints. Year-over-year inflation was 2.4 percent in November, with forecasters expecting inflation to fall to around the midpoint of the target range in the first quarter of 2026; the Committee noted that the December CPI reading may temporarily push inflation close to the upper bound before it declines again. The shekel strengthened by 3.1 percent against the US dollar and by 1.5 percent against the euro over the period reviewed, while Israel’s risk premium (CDS) was described as close to its prewar level. The Research Department forecast estimates GDP growth of 2.8 percent in 2025, 5.2 percent in 2026 and 4.3 percent in 2027, and projects inflation of 2.5 percent at end-2025, 1.7 percent in 2026 and 2 percent in 2027; it also forecasts a 2025 budget deficit of about 4.8 percent of GDP, 3.9 percent in 2026 and a debt-to-GDP ratio of 68.5 percent at end-2025, remaining broadly similar through 2027. The Governor said the future interest rate path will be guided by inflation developments, economic activity, geopolitical uncertainty and fiscal developments, and highlighted the Research Department’s baseline projection for a policy rate of 3.5 percent at end-2026 with further moves expected to be gradual and cautious. He also pointed to the need to pass the 2026 budget in the Knesset while adhering to the 3.9 percent of GDP deficit ceiling, given risks around additional defence spending and revenue assumptions.