Bank of Israel Cuts Interest Rate to 3.75%: Economic Recovery and Policy Outlook

Note: This section contains information in English only.
Source: Dukascopy Bank SA
On May 25, 2026, the Monetary Committee of the Bank of Israel reduced the benchmark interest rate to 3.75%. This decision serves to support economic recovery and promote financial stability in the face of ongoing domestic and global geopolitical volatility.

Economic Recovery and Labor Market Dynamics

The Israeli economy is currently emerging from a contractionary period during the first quarter of 2026, largely precipitated by the impact of "Operation Roaring Lion." This quarter recorded a 3.3% annualized decline in GDP, attributed to reductions in both private consumption (–4.7%) and public expenditure (–5.7%).

Inflation, Currency, and Housing Trends

Domestic inflation remains well-managed, currently tracking at 1.9% annually, which positions it comfortably within the Bank's target range. While fiscal developments, fluctuating energy prices, and geopolitical tensions remain potential inflationary drivers, the recent appreciation of the shekel up 8.3% against the US dollar and 7.2% against the euro acts as an effective moderating force against these pressures. Simultaneously, the housing market shows signs of cooling; despite a nominal 0.3% price increase in February and March, annual home prices have trended downward by 1.2%.



The Global Macroeconomic Context

The Committee's policy decision is informed by an increasingly complex global environment. While major central banks have largely maintained interest rates to combat rising global inflation, economic growth remains positive despite pervasive supply chain disruptions and persistent uncertainty. This global resilience is underscored by the United States' 2% annualized growth rate during the first quarter of 2026, providing a baseline of external stability even as domestic policy remains focused on mitigating localized risks.
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