The Bank of Israel has cut interest rates by 25 basis points to 4% for the second consecutive time. The prime rate now stands at 5.5%.
The decision ran counter to expectations among most economists at banks and investment houses. Factors likely behind the move included the strengthening of the shekel against the dollar and the euro, as well as expectations that inflation will continue to ease following the December consumer price index.
Market tension had mounted ahead of the decision, with speculation over whether the Bank of Israel governor would surprise markets with a second rate cut.
After the announcement, Governor Prof. Amir Yaron moved to temper expectations, saying Israel would not return to the ultra-low interest rate environment seen during the coronavirus period.
Last month, the central bank cut interest rates for the first time in two years. That decision followed a sharp drop in inflation into the government’s annual target range of 1% to 3%. As Israel enters 2026, inflation stands at 2.4%, after the November index posted an unusually steep decline of 0.5%.
Speaking to ynet after the latest decision, Yaron said the central bank would continue to act cautiously.
“We still need to pursue a measured, gradual and responsible policy,” he said. “Uncertainty remains high. Economic activity is strong, demand remains high, wages are rising and unemployment is low.”
According to Yaron, economic conditions allowed for a rate cut only at this stage, and future decisions would depend on developments ahead.
“What made this reduction possible were several factors, first and foremost the moderation and stabilization of inflation within the target range of 1% to 3%,” he said. “We are also seeing a decline in risk levels, alongside rising economic activity and some reduction in the intensity of the fighting.”