What are the chances that the Bank of Israel will lower the interest rate again on Tuesday?

After the Bank of Israel's monetary committee lowered the interest rate in May and July, it will publish its next decision on Tuesday. Most estimates lean towards keeping it at 3.5%, but the possibility of a third consecutive reduction, by 0.25%, to 3.25%, is still on the table.

The data presents a complex picture: on one hand, annual inflation has fallen to 1.5%, the shekel is strong, and economic activity is still below the long-term trend. On the other hand, the unemployment rate is low, many sectors are short of workers, government spending is increasing, and security uncertainty continues. Therefore, the Bank of Israel may prefer to wait and examine the impact of the recent cuts.

At the financial giant Citi, they estimate that the interest rate will remain unchanged. The bank's economists believe that although there are good arguments for another reduction, there is no urgency to act now. However, they estimate that the easing process is not yet over: one reduction is expected by the end of the year and another in the first quarter of 2027, down to 3%.

In contrast, at the investment house Meitav, they estimate that the interest rate will be lowered this week by 0.25%. According to them, low inflation, the strength of the shekel, and the level of activity in the economy justify further encouragement of the economy. Economists at Leader Capital Markets point to the opposing forces facing the committee. Chief economist Yonatan Katz explained that "on one hand, inflation expectations are low and the damage to industry due to the sharp appreciation of the shekel support an interest rate cut. On the other hand, the return of the economy to full activity, except for the hotel sector, while there is a shortage of workers, supports a cautious monetary policy."

Why wait?

A central reason for waiting is the state of the labor market. The unemployment rate is low and there is still a shortage of workers in many sectors. Such a situation could lead to wage increases, make services more expensive, and cause further price hikes. Fiscal policy also requires caution. The increase in civilian and security spending keeps the deficit at a high level. If the government continues to expand the budget without appropriate funding sources, demand may increase and with it prices.

Added to this is global uncertainty. Central banks in various countries have been adopting a more cautious policy in recent months, and it is unclear when and at what pace the US central bank will change the interest rate. Under such conditions, the Bank of Israel may prefer to maintain a safety margin to prevent shocks to the shekel exchange rate and capital markets. Another consideration is the pace of reductions. The interest rate has already been lowered four times since November 2025, from 4.5% to 3.5%. After such a move, it is sometimes customary to wait and see how it has affected households, mortgage holders, and businesses.

Why lower it?

The main argument in favor of a reduction is annual inflation, which stands at only 1.5%, the lowest level since May 2021. The figure is below the center of the price stability target set by the government, which is 1% to 3%, and gives the Bank of Israel room to continue easing.

The strength of the shekel is another reason. It makes imported products cheaper, including raw materials, consumer goods, and energy, thereby helping to moderate price increases. At the same time, the strong currency makes it difficult for exporters and industry, and an interest rate cut may ease their burden. Even after the recent cuts, the gap between the interest rate and inflation stands at about 2%. This means that the real interest rate is still relatively high. Supporters of a reduction argue that such a situation burdens households, makes mortgages and credit more expensive, weighs on small businesses, and could delay growth.

The Bank of Israel interest rate currently stands at 3.5% and the prime rate at 5%. If the interest rate is lowered this week by 0.25%, the prime rate will drop to 4.75%. However, the Bank of Israel is also monitoring what is expected in the coming months. The Consumer Price Index for August is expected to rise by about 0.9%, and some estimate it may even approach 1%, partly due to the 61 agora (8.2%) increase in fuel prices at the beginning of the month. On the other hand, at the beginning of September, the fuel price is expected to drop by about 25 agorot and moderate the September index.

The president of Lahav, the Chamber of Independent Organizations and Businesses in Israel, Adv. Roi Cohen, demanded at the end of the week to lower the interest rate by 0.5%: "The Israeli economy needs a boost right now. This is the time to move from a policy of waiting to a policy that encourages growth. There is room for the governor to announce an interest rate cut of 0.5% at once, right now."