For the first time in nearly two years, and as expected, the Bank of Israel Monetary Committee decided to reduce the bank’s key interest rate by 0.25% to 4.25%.
Thus, the bank joins, and some might say too late, many countries that have begun lowering interest rates in recent months, the most important of which are the US Federal Reserve, the European Central Bank, and the Bank of England.
The basic factors mentioned in the announcement of the Monetary Committee’s decision are moderation of the annual inflation rate to 2.5%. Economic growth is below the long-term trend, despite the sharp increase in economic activity in the third quarter; House prices fell in October for the seventh month in a row; Low risk premium in Israel; Since the previous interest rate decision, the shekel has risen by 1.3% against the US dollar, by 2.9% against the euro, and by 2.2% in terms of the effective nominal exchange rate.
However, the Bank of Israel notes that the labor market remains tight, that the ratio between the number of job vacancies and the number of unemployed remains high and that the pace of wage increases continues to rise.
Commenting on this announcement, Mizrahi-Tefahot Bank’s chief market economist, Ronen Menachem, said: “For a long time there was no widespread agreement that the interest rate would fall, and there were those who did not rule out a 0.5% cut. However, there are many question marks about the timing and pace of future cuts. According to the Bank of Israel’s current macro forecast, the interest rate will fall by only 0.5% by the last quarter of 2026. Compared to Mizrahi-Tefahot Bank, the interest rate will fall by only 0.5% by the last quarter of 2026.” Previous interest rate announcement on 29 September The last part of today’s announcement gives a better description of the situation, as political uncertainty shifts from being a factor subject to developments, and while last time there was talk of inflation being close to target, now the focus is on price stability, and on the other hand, fiscal policy is not mentioned, and we see its importance increasing.
“This time, the Bank of Israel added to its explanation the increasing pace of wage rises and reiterated that the labor market is tight. Domestic stock indices also emerged favorably compared to the rest of the world. This was not mentioned last time. On the face of it, the strength of economic growth in the third quarter does not indicate an urgent need to cut interest rates faster.
“The next interest rate decision will be announced on January 5, 2026, and will be accompanied by new macroeconomic forecasts. This will be very important for the severity of interest rate cuts in 2026.”
Other analysts have expressed similar doubts about whether today’s rate cut portends a rapid downward trend in the price. However, Metaf chief economist Alex Zabieczynski wrote: “The level of interest rates in various countries in the past decade has been inversely related to the strength of the currency. The stronger the currency, the lower the interest rate. Unless some extraordinary event occurs, the shekel will continue to strengthen and put pressure on the Bank of Israel to lower the interest rate to a lower level.”
Published by Globes, Israel Business News – en.globes.co.il – on November 24, 2025.
© Copyright Globes Publisher Itonut (1983) Ltd., 2025.
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