Bank of Israel Cuts Interest Rate to 3.5% for Second Consecutive Time in 2026

The Bank of Israel's Monetary Committee decided on Monday to reduce the interest rate by 0.25 percentage points to 3.5%. This marks the second consecutive rate cut and the third since the start of 2026, when the rate was 4.25%. The decision aligned with economists' forecasts and did not surprise the markets. Governor Prof. Amir Yaron is scheduled to hold a press conference at 16:15 to explain the rationale behind the decision and present the bank's updated macroeconomic forecast.

The rate cut follows inflation stabilizing at an annual rate of 1.9% over the past two months, which is within the Bank of Israel's target range of 1% to 3%. Inflation expectations have also declined below 2%, providing the bank with room to ease monetary policy. The bank noted that the stable inflation environment allows for some monetary easing, which could help address the strong shekel that is hurting exporters' profitability, especially in the high-tech sector, and weighing on economic activity.

Alongside the rate decision, the Bank of Israel released an updated macroeconomic forecast. Previously, at the end of March, it projected 3.8% economic growth in 2026 and 5.5% in 2027. For comparison, the Finance Ministry estimated 4% growth for 2026 in early June, while the IMF forecasted 3.5% last week. The earlier forecast also predicted a budget deficit of 5.3% of GDP and a debt-to-GDP ratio of 70.5%. Inflation was expected to end 2026 at 2.2% and 1.8% in 2027, with interest rates projected to be between 3.5% and 3.75% by March 2027. The current rate cut has brought the rate to a level the bank had anticipated would be reached only in about eight months.

The committee meeting included Governor Amir Yaron, Deputy Governor Andrew Abir, Research Division Director Dr. Adi Brender, and external members Prof. Naomi Feldman and Prof. Uri Heftz. The committee continues to operate with five members instead of the legally required six. Reports indicate consensus on appointing Dr. Gil Bafman to the committee, but the government has yet to approve the nomination.