For the third consecutive time: Bank of Israel lowers interest rate by 0.25% to 3.25%
Ongoing disinflation and the strength of the shekel, despite a sharp rise in fuel prices, have led the Monetary Committee to decide on a further reduction in the base interest rate.
The Bank of Israel announced on Tuesday a reduction of the interest rate by 0.25%, marking the third consecutive cut and the fourth since the beginning of 2026. This decision contradicts most market forecasts. The base interest rate will now stand at 3.25%, with the prime rate set at 4.75%. The new rates will take effect this Thursday.
Recall that the interest rate was also reduced by 0.25% in both May and July. The next decision is expected about a week before the Knesset elections. The primary driver for this reduction is annual inflation, which currently stands at just 1.5%—the lowest level since May 2021 and well below the government's target range of 1% to 3%, providing the Bank of Israel with room for further easing.
The strength of the shekel is another factor supporting the cut, as it lowers the cost of imported raw materials and consumer goods. However, a strong currency poses challenges for exporters, and lower interest rates are expected to provide them with some relief. According to the Bank of Israel's forecast and public statements by the Governor, the interest rate target for next year is 3%. Barring any dramatic security or economic shifts, at least one more rate cut is anticipated in the coming months.
In October 2025, the interest rate was 4.5%; today's move completes a total reduction of 1.25% in less than a year. Nevertheless, the committee's decision is relatively surprising given the increase in government spending and ongoing security uncertainty. Furthermore, fuel prices hit an all-time high today, reaching 8.25 NIS per liter for 95-octane gasoline, which is expected to put upward pressure on the Consumer Price Index in the coming months.
Minister of Finance Bezalel Smotrich stated:
"As I have said throughout this period, lowering the interest rate is a necessary step, and I welcome the Governor's move in the right direction. It would have been better if the rate had been lowered by a larger margin. The interest rate must continue to fall. This way, Israeli citizens and business owners will pay less on loans, it will be cheaper to initiate and maintain businesses, and relief will be felt regarding the cost of living. The responsible management of the economy in recent years and the resilience of the Israeli economy allow for this reduction, providing relief to households and the public."
