The Bank of Israel (BoI)'s Monetary Committee cut the interest rate by 0.25% to 3.25% on Tuesday.
This comes amid a backdrop of the relatively moderated inflation rate and rapidly growing gross domestic product (GDP) in recent months and constitutes the third consecutive interest rate reduction in the past 12 months.
While uncertainty in the economy remains high, Israel's risk premium continued to remain at levels similar to those prevailing before the October 7 massacre, and the shekel's exchange rate with key global currencies remained without significant change.
The committee's policy focuses on price stability, support for economic activity, and market stability, BoI said.
"The interest rate path will be determined according to developments in inflation, economic activity, geopolitical uncertainty, and fiscal developments," BoI noted.
Israel's Consumer Price Index remained unchanged in June and rose by 0.3% in July. Inflation over the past 12 months stood at 1.5% in July, below the midpoint of BoI's target. According to forecasters' assessments and one-year-ahead expectations from most sources, inflation is expected to remain near the midpoint of BoI's target range in the coming months.
Shekel relatively stable in global monetary trade
Since the last decision to cut Israel's interest rate in July, the shekel appreciated by 0.6% against the US Dollar, depreciated by 1% against the Euro, and depreciated by 0.1% in effective nominal terms.
BoI's Monetary Committee estimated that the inflation environment will continue to be affected by geopolitical developments and energy prices, the risk premium and exchange rate, demand developments and supply constraints, alongside fiscal developments.
Israel's Central Bureau of Statistics' national accounts data for the second quarter of 2026 indicate a growth of 15.4% in annual terms compared with the first quarter of the year, and an increase of 6.2% as compared with the fourth quarter of 2025.
This, together with revisions to previous CBS data, narrowed the gap from the long-term growth trend to approximately 0.8%.
Israel's economy sees ramifications of war with Iran after Operation Roaring Lion
Growth in Q2 2026 was affected by rapid growth in all GDP components and partly reflects recovery from the damage in Q1 against the onset of Operation Roaring Lion, which began when Israel carried out intense airstrikes on Tehran on February 28.
However, excluding the activity of Israeli companies abroad, GDP in Q2 was 3.8% higher than in Q4 2025.
The labor market in Israel continues to be tight, according to BoI data, with a slight increase in participation rates and broad unemployment.
In July, employment rates for Israelis aged 25-64 stood at 78.9%, and the participation rate stood at 81.3%. The rate of those temporarily absent due to the reserve military service remained stable at 0.5%. The broad unemployment rate among the 25-64 age group stood at 3.2%, similar to before Operation Roaring Lion began, and the job vacancy rate rose slightly to 4.5%.
Additionally, the rate of nominal wage increases in Q2 stood at 6.2% compared with the previous year, largely influenced by increases in minimum wage and in the public sector, while wages in the private sector, excluding hi-tech businesses, rose by 5.4% from March to May.
However, geopolitical tensions, including war with Iran, led to a surge in energy prices and disruptions in supply chains. The price of a barrel of Brent oil rose by about 25% to $90, and European gas prices reached their peak since the outbreak of Operation Roaring Lion.
Within Israel's housing market, the availability of apartments for sale remained stable, data showed.
BoI said that a summary of the monetary discussions held by the committee will be published on September 15, and the next interest rate decision will be published on October 21, less than a week before the slated Knesset elections on October 27.