Bank of Israel Cuts Interest Rate for Third Consecutive Time

The Bank of Israel's Monetary Committee announced on Tuesday its decision to lower the benchmark interest rate by 0.25% to 3.25%. This marks the third consecutive rate cut and the fifth reduction in less than a year. The decision comes amid moderating inflation, which has fallen below the target range in recent months.

The central bank stated that its policy focuses on price stability, supporting economic activity, and market stability. The future path of interest rates will depend on inflation developments, economic activity, geopolitical uncertainty, and fiscal developments. While inflation has moderated, and the economy grew strongly in the first half of the year, underlying activity appears more subdued when excluding overseas production. Geopolitical uncertainty remains high, but Israel's risk premium and the shekel's exchange rate have remained stable, similar to pre-October 7 levels.

Consumer price inflation was flat in June and rose 0.3% in July. The 12-month inflation rate in July stood at 1.5%, below the target's midpoint. Forecasters expect inflation to remain near the target midpoint in the coming months. Recent national accounts data show a significant 15.4% annual growth in the second quarter, partly reflecting recovery from earlier disruptions, though growth excluding Israeli companies' overseas activity was more moderate.

The labor market remains tight, with slight upticks in participation and broad unemployment rates. Wage growth has been influenced by minimum wage and public sector increases, as well as changes in the workforce composition due to the ongoing conflict. The housing market shows stable inventory and a moderate increase in transactions, with apartment prices rising slightly after a recent decline.

Globally, geopolitical tensions in the Middle East have driven up energy prices and disrupted supply chains. Major central banks have kept interest rates unchanged, but future rate paths have been revised upwards. The Bank of Israel's next interest rate decision is scheduled for October 21, 2026.