Israel Cuts Rates to Four-Year Low
Israel Cuts Rates to Four-Year Low
The News
The Bank of Israel cut its benchmark interest rate by a quarter point to 3.25% on Tuesday, its third straight cut in 12 months and, per the Times of Israel, the lowest rate in four years.
The bank's Monetary Committee acted after inflation came in at 1.5% over the 12 months through July — below the midpoint of its target — while the economy grew fast in the second quarter.
The backdrop is the war with Iran: Brent crude has climbed about 25% to roughly $90 a barrel since Operation Roaring Lion began, the Bank of Israel said, and European gas prices hit their highest level since the operation started.
Timeline
Israel launched intense airstrikes on Tehran, the start of Operation Roaring Lion, which the central bank blames for a first-quarter hit to output and for a surge in energy prices and supply chain disruptions.
Israel's Consumer Price Index was unchanged in June and rose 0.3% in July, leaving 12-month inflation at 1.5% in July.
The Monetary Committee cut the rate from 3.75% to 3.5%.
Central Bureau of Statistics data showed GDP growth of 15.4% in annual terms against the first quarter, and 6.2% against the fourth quarter of 2025. Excluding the activity of Israeli companies abroad, second-quarter GDP was 3.8% above the fourth quarter of 2025.
The committee cut again, to 3.25%.
Reactions
The Bank of Israel said its policy is focused on price stability, support for economic activity and market stability, and that "the interest rate path will be determined according to developments in inflation, economic activity, geopolitical uncertainty, and fiscal developments."
A central banker told Reuters that further cuts are possible if inflation stays low.
The Times of Israel reported that the bank warned the recovery is only partial, and that Israeli manufacturers accused Governor Amir Yaron of doing too little too late, with a strong shekel squeezing exporters' profits.
What's Next
A summary of this week's monetary discussions is due to be published September 15.
The next interest rate decision comes October 21 — less than a week before Israel's Knesset elections, slated for October 27.
More
The central bank said uncertainty remains high, but Israel's risk premium has stayed near the levels that prevailed before the October 7 massacre, and the shekel's exchange rate against major currencies was little changed. Since the July decision the shekel appreciated 0.6% against the US dollar, depreciated 1% against the euro and slipped 0.1% in effective nominal terms.
The labor market remains tight. In July, the employment rate for Israelis aged 25-64 was 78.9% and the participation rate was 81.3%, with broad unemployment in that group at 3.2% — similar to before Operation Roaring Lion. The job vacancy rate edged up to 4.5%. Nominal wages rose 6.2% year over year in the second quarter, driven largely by minimum wage and public sector increases; private sector wages excluding hi-tech rose 5.4% from March to May.
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