Bank of Israel Cuts Interest Rate for Third Consecutive Time

The Bank of Israel announced a quarter-point interest rate cut, bringing the benchmark rate down to 3.25%. This marks the third consecutive reduction. Consequently, the prime lending rate, which influences most loans and mortgages in the economy, will decrease to 4.75%.

The central bank cited a recent slowdown in inflation as the primary reason for the decision. The consumer price index remained unchanged in June and saw a modest 0.3% increase in July. Over the past twelve months, inflation stood at 1.5% in July, falling below the bank's target range.

Economic activity has also shown signs of recovery. Gross domestic product (GDP) grew at a 15.4% annualized rate in the second quarter of 2026 compared to the first, and was 6.2% higher than the last quarter of 2025. The bank noted that some of this growth reflects a rebound from the impact of "Operation "Lion's Roar" in the first quarter. However, excluding the activity of Israeli companies abroad, the picture is more moderate, with Q2 GDP up 3.8% annually compared to the end of 2025.

While business activity continues to improve, some sectors remain below pre-March 2026 levels. Consumer credit card spending has been volatile and slightly below its long-term trend. High-tech capital raising in the third quarter reached approximately $3 billion, lower than the first two quarters. The labor market remains tight, with nominal wages rising 6.2% year-over-year in April-June, and 5.4% in the business sector excluding high-tech. The broad unemployment rate for prime working ages was 3.2% in July, and job vacancy rates slightly increased to 4.5%.

In the housing market, the inventory of unsold homes remains high and stable. A moderate increase in transactions was observed in May and June, particularly for new apartments. Apartment prices rose 0.1% in May-June but are still down 1.5% annually. Mortgage lending in July, seasonally adjusted, was around 10 billion shekels.

The Bank of Israel acknowledged that uncertainty remains high, largely due to geopolitical tensions. Nevertheless, Israel's risk premium has recently stabilized at levels similar to those before October 7th, and the shekel's exchange rate has not significantly changed. Future interest rate decisions will depend on inflation, economic activity, the geopolitical situation, and the state's budget, the bank emphasized.