Bank of Israel Cuts Key Rate to 3.25% in Third Consecutive Easing

The Bank of Israel has reduced its benchmark interest rate by 25 basis points to 3.25%, marking the third consecutive cut and bringing borrowing costs to their lowest level since late 2022. The decision, announced on Tuesday, diverges from the tighter monetary policy stance seen in several major economies.

Annual inflation stood at 1.5% in July, comfortably within the central bank's 1%–3% target range and below its preferred 2% midpoint. Deputy Governor Andrew Abir said the recent easing in price pressures removed any compelling reason to hold rates steady. "We've seen the last few months inflation has been coming down," he noted, adding that the outlook for further cuts depends on incoming data, geopolitical developments, and currency movements.

The move surprised most analysts, with eight of 14 economists in a poll expecting rates to remain unchanged. The central bank had paused its easing cycle amid the conflict with Iran and supply-side inflation concerns before resuming cuts in May and July.

Manufacturers welcomed the reduction, and Finance Minister Bezalel Smotrich called for even lower borrowing costs. Markets now anticipate at least one more cut, with central bank projections pointing to rates at 3% by mid-2027. Jonathan Katz of Leader Capital Markets expects the next reduction in November, citing the upcoming election and potential shekel appreciation as key factors. Morgan Stanley's Georgi Deyanov also forecasts a final cut in November, though he cautioned that higher-than-expected fiscal spending could delay further easing.

Following the announcement, the shekel weakened 1.1% against the dollar to 3.022, while Tel Aviv shares rose as much as 0.7%. The currency remains roughly 5% stronger so far in 2026.