Bank of Israel Cuts Interest Rate for Third Consecutive Time

The Bank of Israel has lowered its benchmark interest rate by 0.25%, marking the third consecutive reduction and bringing the rate to 3.25%, its lowest point since November 2022. This is the fourth rate cut this year, with previous reductions occurring in January, May, and July. The last time the central bank implemented three successive rate cuts was in late 2008, during the global financial crisis.

The decision to lower the rate was largely anticipated, with about half of analysts predicting such a move. This indicates the Bank of Israel feels confident about the low risk of inflationary pressures. The annual inflation rate currently stands at a modest 1.5%, with inflation expectations for the coming year also low at 1.4%. Domestic economic growth, excluding overseas production by companies like Nvidia, was around 1% in the first half of 2026 compared to the latter half of 2025. Consequently, the bank views a rate cut as a means to stimulate economic activity without triggering inflation.

However, the Bank of Israel acknowledges potential inflationary risks stemming from increased public spending due to the ongoing war and a reduced workforce because of reservist military service. Some had speculated these factors might lead the bank to delay a rate cut until October. The Monetary Committee's statement highlighted moderating inflation, subdued economic activity when excluding overseas production, and a slight rise in the broader unemployment rate. It also noted that Israel's risk premium is at pre-October 7 levels and the exchange rate is stable, reflecting a strong shekel.

These factors collectively suggest to the committee that inflationary risks are distant, justifying another rate cut. The bank also mentioned that geopolitical developments, risk premiums, exchange rates, domestic demand, and fiscal developments could influence inflation in opposing directions. Unlike previous statements that emphasized inflation risks, the current wording acknowledges potential deflationary pressures as well. The committee specifically pointed to uncertainty regarding the 2026 defense budget increase and the government's unclear financing plans.

The bank presented a nuanced view on growth, noting a sharp increase in the second quarter and a narrow output gap of only 0.8% after revisions. However, excluding overseas production reveals more moderate actual growth. Credit card spending is slightly below its long-term trend, and while business sentiment surveys show improvement, net balances in most sectors remain below pre-March 2026 levels. Business leaders, such as Dov Amitai, Chairman of the Business Sector Presidency, welcomed the rate cut as a responsible step that conveys confidence in the Israeli economy.