The Bank of Israel published its Monetary Policy Report for the second half of 2025, detailing the Monetary Committee’s policy decisions and the macro-financial backdrop. The Committee held the interest rate at 4.5% in July, August and September 2025, then reduced it by 0.25 percentage points in November 2025 and again in January 2026, ending the reviewed period at 4%. Over the half-year, inflation moved from above the target range to within it, with annual inflation at 2.4% at the end of the period (based on the November CPI) versus 3.1% at the end of the previous half-year. One-year inflation expectations shifted to around the midpoint of the target range and the shekel appreciated markedly, while longer-term expectations remained near the midpoint; the Committee still flagged risks of renewed inflation pressures from geopolitical developments, demand growth amid supply constraints, and fiscal developments. The report also notes a sharp recovery in activity in the third quarter of 2025 after contraction in the second quarter, continued tightness in the labor market alongside some recent easing in supply constraints, a roughly 6% shekel appreciation against the US dollar, and a marked decline in Israel’s risk premium. Business-sector credit continued to expand, arrears remained low, and banks and insurers maintained high capital and solvency ratios; the cumulative fiscal deficit declined to 4.7% of GDP in December, while the government approved a 2026 budget proposal with a 3.9% deficit ceiling. In its January 2026 forecast, the Research Department estimated 2025 GDP growth at 2.8% and projected growth of 5.2% in 2026 and 4.3% in 2027, with inflation expected at 2.5% at end-2025, 1.7% in 2026 and 2% in 2027; the policy rate was assessed at 3.5% at end-2026. The Bank noted that an English version of the report will be published soon.

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