Israel Central Bank Cuts Interest Rate to 3.25% as Economy Shows Stronger Growth
The Bank of Israel has reduced its benchmark interest rate by 0.25 percentage points to 3.25%, citing moderating inflation and stronger economic activity during the first half of 2026.
The Monetary Committee announced the decision on saying its monetary policy continues to focus on price stability, supporting economic activity and maintaining financial-market stability.
Inflationary pressure has eased
The central bank said inflation has moderated in recent months, with the inflation rate during the reviewed period remaining below the midpoint of Israel’s target range.
However, policymakers noted that uncertainty remains high because of geopolitical developments and their potential impact on economic activity and energy prices.
Exchange-rate movements, fiscal developments, demand conditions and supply constraints will also influence the inflation outlook, according to the committee.
Economy records strong second-quarter performance
Official national accounts data showed that Israel’s gross domestic product increased at an annualized rate of 15.4% in the second quarter of 2026 compared with the first quarter.
The economy was also 6.2% larger than in the fourth quarter of 2025, reflecting a significant improvement in economic activity during the first half of the year.
The Bank of Israel cautioned, however, that part of the improvement reflected economic recovery following the disruption experienced during the first quarter.
Government deficit remains below target
The accumulated government deficit over the previous 12 months stood at 3.4% of GDP in June and July, according to the central bank.
That level remained below the government’s 2026 deficit target.
The Bank of Israel said tax revenues have continued to perform above their longer-term trend, while uncertainty remains over potential increases in the defense budget and the fiscal measures that may be needed to finance them.
Labour market remains tight
The labour market continues to show relatively strong conditions, although recent data indicated a modest increase in participation and broader unemployment.
The central bank also noted that major central banks in developed economies had generally maintained their interest rates during the period under review.
Geopolitical uncertainty remains a key risk
Despite stronger economic growth and easing inflation, the Bank of Israel highlighted geopolitical uncertainty as an important factor affecting future economic conditions.
Energy prices, the country’s risk premium, exchange rates and government spending could all influence inflation and economic activity in the coming months.
The central bank said the shekel had appreciated by 0.6% against the US dollar since the previous interest-rate decision while weakening by 1% against the euro.
Next interest-rate decision due in October
The Bank of Israel’s next monetary policy decision is scheduled for October 21, 2026.
Until then, policymakers are expected to closely monitor inflation, economic growth, fiscal policy, financial markets and geopolitical developments.
The September rate cut marks another step in the central bank’s effort to balance price stability with support for economic recovery as Israel’s economy navigates continued uncertainty.
