Will the Bank of Israel Lower the Interest Rate Again?

SadaNews Economics Translation - Economic experts have ruled out the possibility of the Israeli central bank lowering the base interest rate by a quarter percentage point to 4% tomorrow, Monday, while other experts predicted that there is a likelihood exceeding 50% that this will happen.

The Hebrew site Ynet reported, according to SadaNews Economics translation, that there are estimates indicating that the Bank of Israel aims to lower the interest rate four times this year.

The site added, "On November 24, 2025, the monetary committee of the Bank of Israel reduced the interest rate for the first time after 14 decisions over 23 months, by a quarter percentage point to 4.25%. The base interest rate was set at 5.75%."

It continued, "This decision came as a result of the sharp decline in the inflation rate to below the annual target set by the government, which is 1%-3%, as it reached 2.4% at the beginning of 2026, after the November index dropped significantly by 0.5%."

According to SadaNews Economics translation, "Other reasons that may mitigate the severity of the interest rate cut, which may also affect the current decision, include the noticeable rise in the value of the shekel. On Friday, it rose again against the dollar by 0.28%, reaching an exchange rate of 3.1810 shekels, the lowest level in four years. It also rose against the euro by 0.39%, reaching an exchange rate of 3.7308 shekels."

Inflation forecasts for December and January indicate encouraging signals, leaning toward the possibility of further interest rate cuts: it is expected that the consumer price index will decline by 0.1% or remain unchanged in December 2025 and January 2026. The expected decline in December is attributed to seasonal factors, including decreases in the prices of vegetables and fruits, housing, education, entertainment, transportation, and communications, in addition to the drop in prices of certain products at the year's end due to a certain slowdown in consumption.
The sharp decline in fuel prices in January by 26 cents per liter, along with increases in property taxes (at least 1.6%), electricity (1.5%), and water (2.35%), will likely lead to a negative or zero index. This is also due to the fact that tax increases starting January 2025 will not affect the change in the index in January of this year.
The December index of last year dropped by 0.3%, so it is expected that the index for December this year will decrease by 0.1%, contributing to an annual inflation rate of 2.6%. However, the index for January of last year rose mainly due to an increase in the value-added tax to 18%, sharply rising by 0.6%. The expected decline of 0.1% in the January index this year will lead to a decline in the annual inflation rate by 0.7%, reaching its lowest level in many years at 1.9%. This rate is below the midpoint of the inflation target set by the government, and it will likely permit a rate cut at the end of February, unless there are security or political circumstances that affect economic stability.

Most analysts expect the consumer price index to rise between 2.0% and 2.2% in 2026. In this case, the Bank of Israel may cut the interest rate at least three times over the course of a year, reaching 3.5%. Some analysts believe the interest rate will be reduced by a full percentage point by the end of 2026.