Bank of Israel Cuts Interest Rate for Third Time This Year to Support Economy

The Bank of Israel's Monetary Committee announced on Monday a 0.25% reduction in the interest rate, lowering it to 3.5%. This marks the second consecutive rate cut and the third since the beginning of 2026, signaling a clear shift in the central bank's monetary policy aimed at supporting ongoing economic recovery. The decision follows stable annual inflation at 1.9% in May, which is right at the government's official stability target.

A key factor enabling this rate cut was the signing of a memorandum of understanding between the United States and Iran, which caused a sharp 30% drop in global oil prices to around $72 per barrel. This development helped ease global geopolitical tensions and reduced Israel's risk premium. However, the Bank of Israel emphasized that regional uncertainty remains high, and future decisions will depend on fiscal and security developments.

Alongside the rate cut, the bank's research division raised its growth forecasts for the Israeli economy, assuming no new conflict with Iran and continued intensity of fighting in Lebanon. The updated projections estimate GDP growth of 4% in 2026 and 5.5% in 2027. On the fiscal front, as long as the defense budget does not exceed existing reserves, the government deficit is expected to be 4.9% of GDP this year and 4.2% next year, maintaining a debt-to-GDP ratio of 69%.

Governor Amir Yaron noted inflationary pressures that prevent a steeper rate cut, including a very tight labor market with a broad unemployment rate of 3%, a 6.8% wage increase from March to May compared to last year, a 3.1% depreciation of the shekel against the dollar since the last rate decision, and accelerating housing costs, especially in rental contracts where prices jumped 6.8%. The committee reaffirmed its focus on price stability while supporting economic activity and financial markets.

Additionally, the bank announced a technical update: the next interest rate decision, originally scheduled for August 31, will be postponed to Tuesday, September 1, 2026, with the new rate effective from September 3. The full monetary discussion summary will be published on July 20.