Bank of Israel Cuts Interest Rate to 3.25% Amid Lower Inflation

The Bank of Israel announced on Tuesday its decision to lower the benchmark interest rate from 3.5% to 3.25%. This marks the fifth rate cut in the past year, a period characterized by relatively low inflation. While analysts' predictions were divided, with some expecting the rate to remain unchanged, the central bank cited a moderation in inflation, which stood at 1.5% year-over-year as of the end of July, as a key factor in its decision. The bank noted that inflation is currently below the lower bound of its target range.

Despite a reported rise in GDP in the second quarter of 2026, the Bank of Israel clarified that a significant portion of this growth was driven by overseas production by Israeli companies. Geopolitical tensions, particularly between Iran and the United States, had led some analysts to anticipate a more cautious approach, with the rate remaining static. However, the bank acknowledged these concerns, stating in its announcement that "uncertainty remains high due to geopolitical tensions." It also pointed out that Israel's risk premium has remained at pre-October 7 levels and the shekel's exchange rate has been stable, suggesting economic resilience.

The Bank of Israel indicated that both GDP and credit card purchase data are nearing pre-October 7, 2023, trends, signaling economic recovery from the war. Looking ahead, the bank anticipates inflation will rise in the coming months but remain near its target of 2%. Factors influencing future inflation include geopolitical events affecting energy prices, risk premiums, exchange rates, government spending, and supply constraints, particularly concerning labor.

Industry leaders reacted to the decision. Avraham Novogrodsky, President of the Manufacturers Association of Israel, welcomed the rate cut as a positive step recognizing the inflation slowdown and the negative impact of the strong shekel on exports. However, he argued the move was delayed, as inflation has been within the target range for a year. He also highlighted the continued pressure on exporters due to the shekel's appreciation, urging the Bank of Israel to pursue more rapid and consistent rate reductions.

Roi Cohen, President of LAHAV (the Organization of Small and Medium Businesses and Self-Employed), criticized the decision as overly conservative and hesitant, potentially harming the Israeli economy. He suggested a larger, half-percentage-point cut was warranted given the economic conditions and the prolonged impact of the war. Cohen also pointed to the burden of high interest rates on small businesses, noting that the average rate for micro-businesses is around 7.9%, making it harder for them to absorb costs.