Bank of Israel Cuts Interest Rate by 0.25% Amid Inflation Slowdown

The Bank of Israel's Monetary Committee announced a 0.25 percentage point reduction in the benchmark interest rate, bringing it down to 3.25%. This decision was made in response to moderating inflation, which stood at 1.5% in the twelve months leading up to July, below the central bank's target range. Economic activity is showing signs of recovery, though significant geopolitical uncertainty and budgetary developments remain.

While inflation has slowed, the Bank of Israel noted that its future trajectory will be influenced by security conditions, energy prices, the exchange rate, Israel's risk premium, demand and supply constraints, and government fiscal policy. The Israeli Shekel has strengthened slightly against the US Dollar and weakened against the Euro since the previous rate decision.

Recent national accounts data indicated rapid economic growth in the second quarter of 2026, with GDP rising significantly year-on-year. However, a portion of this growth reflects a rebound from the economic impact of Operation "Iron Fist." Excluding the overseas production of Israeli companies, the GDP growth was more modest.

Despite the economic recovery, capital raising in the high-tech sector has slowed in the third quarter. The government's cumulative deficit remained below the target for 2026, partly due to lower civilian spending during a period of continuing budget. The Bank warned that increased defense spending and the government's financing measures could impact future deficits.

The labor market remains tight, with high employment and participation rates and a low unemployment rate. Nominal wages have increased, particularly in the business sector excluding high-tech. In the housing market, unsold inventory remains high, though there has been a slight increase in transactions, especially for new apartments. Housing prices saw a modest rise in May-June but are down year-on-year.

Finance Minister Bezalel Smotrich welcomed the rate cut, calling it a necessary step and advocating for further reductions to ease the burden on citizens and businesses and reduce the cost of living. The Association of Mortgage Advisors also praised the move, suggesting it could stimulate the housing market and encourage potential buyers, while cautioning against expecting a return to the near-zero interest rates of the past. They noted a shift towards prime-rate linked mortgage tracks among borrowers.