Bank of Israel Unexpectedly Cuts Key Interest Rate to 3.25%

The Bank of Israel announced on Tuesday, September 1, a surprise reduction of its benchmark interest rate by 0.25% to 3.25% annually. This marks the fourth rate cut since the beginning of 2026 and the third consecutive one, defying expectations from most analysts who had predicted the rate would remain unchanged. The previous reduction occurred in July 2026, also by 0.25%, bringing the rate down to 3.5%. Consequently, the prime lending rate will decrease to 4.75%, effective Thursday, September 3.

The primary justification for the rate cut is the annual inflation rate, which has fallen to 1.5%, its lowest point since May 2021. This figure remains close to the lower bound of the government's target range of 1-3%, providing the central bank room to continue its monetary easing policy. The strengthening of the Israeli shekel also played a role, as it makes imports cheaper and helps curb price increases, though it complicates matters for exporters and industry. The rate cut is intended to alleviate some of this pressure.

Since October 2025, when the benchmark rate stood at 4.5%, it has been lowered by a total of 1.25%. The Bank of Israel and its governor anticipate a target rate of 3% for the upcoming year. Barring significant economic or security shifts, further rate reductions are possible in the coming months. The decision was unexpected given rising government spending and ongoing security uncertainties. Adding to this complexity, the price of 95-octane gasoline reached a record high of 8.25 shekels per liter on September 1, potentially accelerating inflation in the near future.

Finance Minister Bezalel Smotrich welcomed the decision but argued for a more substantial cut, stating that a deeper reduction would further ease borrowing costs for citizens and businesses, foster entrepreneurship, and alleviate the cost of living. He attributed the possibility of such policy easing to the resilience of the Israeli economy and its responsible management in recent years.