The Bank of Israel cuts interest rate by 25 basis points, maintains hawkish tone

ISRAEL - In Brief 25 May 2026 by Sani Ziv
The Bank of Israel yesterday lowered its benchmark interest rate by 25 basis points to 3.75%, following previous rate cuts in December 2025 and January 2026. The move was widely expected by the markets and most forecasters. The chart shows the Bank of Israel’s policy rate, which was reduced in December 2025 and January 2026, and again at the end of May 2026. Markets currently expect an additional rate cut as early as JuneGRAPH 1Bank of Israel policy rate, % Source: Israel Central Bureau of Statistics (CBS).Despite the interest-rate cut, the wording of the statement was relatively hawkish. The Bank of Israel noted that “inflation in Israel continues to remain around the midpoint of the target range; however, since the previous interest-rate decision there has been a sharp increase in the global inflation environment”. In addition, it emphasized that “the Committee assesses that there are risks of renewed inflationary pressures, including geopolitical developments and their impact on economic activity and energy prices, rising demand alongside supply constraints, and fiscal developments”, while only the appreciation of the shekel “may contribute to moderating inflation”. The bank also stated that the contraction in GDP during the first quarter was expected and reflected both the economic disruption and the effects of Operation “Roaring Lion”. At the same time, it highlighted that current activity indicators point to recovery in economic activity following the operation, with credit-card spending data remaining above trend levels. Regarding the fiscal position, despite the decline in the rolling 12-month deficit to 3.8% of GDP, the bank stressed that “there remains uncert...

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