Bank of Israel Cuts Interest Rate by Quarter Point Amid Economic Uncertainty

The Bank of Israel's Monetary Policy Committee has decided to lower the benchmark interest rate by 0.25%, bringing it to a new level. The committee's policy aims to maintain price stability, support economic activity, and ensure market stability. Future interest rate decisions will depend on inflation trends, economic activity, geopolitical developments, and financial market conditions.

Recent inflation has moderated, with the annual rate at 1.5% in July, below the target range's midpoint. While GDP grew robustly in the first half of 2026, excluding overseas activity reveals a more subdued economic picture. Geopolitical tensions continue to create high uncertainty, yet Israel's risk premium has remained stable since October 7th, and the shekel has shown no significant fluctuations. Consumer price inflation was flat in June and rose 0.3% in July.

Analysts anticipate inflation will remain near the target range's midpoint in the coming months and next year. The shekel saw a slight appreciation against the dollar and a depreciation against the euro since the last rate decision. The committee noted that geopolitical events, energy prices, risk premiums, exchange rates, and supply-demand dynamics will influence future inflation.

National accounts data for the second quarter of 2026 showed a strong 15.4% annualized GDP growth compared to the previous quarter. However, after excluding Israeli companies' foreign operations, growth in the first half of the year was more moderate. Current economic indicators suggest fluctuating credit card spending, slightly below its long-term trend, and a continued recovery in business activity, though many sectors remain below pre-March 2026 levels.

High-tech capital raising in the third quarter was around $3 billion, lower than the first two quarters. Goods exports moderated in July after a sharp rise in May and June, while services exports saw a significant increase in June. The cumulative government deficit for the twelve months ending in June and July was 3.4% of GDP, below the 2026 target, partly due to reduced civilian government spending following a supplementary budget.

The labor market remains tight, with slight increases in participation and broad unemployment rates. The employment rate for the 25-64 age group was 78.9% in July, and the broad unemployment rate was 3.2%. Job vacancies saw a slight increase to 4.5%. Nominal wage growth in the economy was 6.2% year-on-year from April to June, influenced by minimum wage hikes and public sector pay increases.

In the housing market, the inventory of unsold apartments remained stable at a high level, with a moderate increase in transactions in May and June, particularly for new apartments. Apartment prices rose 0.1% in May-June. Mortgage lending in July was approximately 10 billion shekels. The annual increase in the housing component of the consumer price index slowed to 3.9% in July.

Local stock market indices traded mixed, and government bond yields rose globally. Israel's risk premium, measured by CDS spreads, remained stable near pre-October 7th levels. Commercial credit continued to grow robustly, led by bank lending, and consumer credit growth was moderate, with low delinquency rates across all sectors.

Middle Eastern geopolitical tensions have driven a sharp rise in energy prices, with Brent crude nearing $90 per barrel and European natural gas prices reaching their highest since the start of the "Operation Iron Swords." The global Purchasing Managers' Index indicates continued global GDP expansion. Global government bond yields have risen sharply, with long-term yields remaining elevated. US GDP grew 1.5% annually in Q2, while the Eurozone grew 1.8%. US inflation was 3.4% in July, while Eurozone inflation rose to 2.9%. Major central banks kept interest rates unchanged, though rate hike expectations have increased in the US and Eurozone.