Bank of Israel Cuts Interest Rate for Third Consecutive Time

The Bank of Israel announced on Tuesday its decision to lower the benchmark interest rate by a quarter of a percentage point, bringing it to 3.25%. This marks the third consecutive rate cut, following two previous reductions of the same magnitude.

The primary factor enabling this monetary easing is a significant slowdown in inflationary pressures. Recent months have seen a decrease in the pace of price increases, with the current inflation rate falling below the Bank of Israel's target range of 1.5%. Officials at the central bank explained that this development provided the necessary room for maneuver to loosen monetary policy.

Alongside the decline in inflation, national accounting data for the second quarter of 2026 indicates robust economic growth. Gross Domestic Product (GDP) surged by 6.2% compared to the final quarter of 2025, partly reflecting the economy's recovery from the impact of "Operation "Lion's Roar" in the first quarter. Even excluding production by Israeli companies abroad, GDP showed a healthy annual increase of 3.8%, demonstrating the resilience of the domestic market.

Financial markets appear to be regaining confidence. Despite ongoing high geopolitical tensions, Israel's risk premium has decreased to levels seen before October 7th. This stability is also reflected in the shekel's exchange rate, which has remained largely unchanged recently. However, the labor market continues to be tight, with business sector wages (excluding high-tech) rising 5.4% year-on-year in March-May. Minor increases in the broad unemployment rate and labor force participation were noted.

In the housing sector, the substantial inventory of available homes has remained stable, helping to prevent sharp price hikes. A modest pickup in market activity was observed in May and June, particularly in new home sales. It remains to be seen whether this latest interest rate cut will further stimulate demand in the real estate market and private consumption.