Third consecutive cut: Bank of Israel lowers interest rates to 3.25%, following economic review

The Bank of Israel has reduced its benchmark interest rate to 3.25%, marking the third consecutive rate cut within a year. This decision was announced on Tuesday by the central bank's Monetary Committee, which cited a combination of moderate inflation and robust economic growth as justification for the move. The rate cut follows reductions in July and earlier in the year, reflecting ongoing efforts to balance price stability with economic expansion. Over the past 12 months, Israel has experienced a series of economic adjustments shaped by both internal dynamics and external pressures. The country's inflation rate, measured by the Consumer Price Index, remained flat in June and increased by just 0.3% in July. Annual inflation in July stood at 1.5%, well below the Bank of Israel's target midpoint. Forecasts suggest that inflation will likely stay close to this level in the coming months, providing some certainty for policymakers. The Israeli currency, the new shekel, has shown relative stability in international markets despite ongoing geopolitical uncertainties. Since the last rate cut in July, the shekel gained 0.6% against the U.S. dollar but lost 1% against the euro. Overall, the effective nominal exchange rate saw minimal changes, indicating that the currency's value remains resilient against major global benchmarks. Economic indicators released by Israel’s Central Bureau of Statistics show strong performance in the second quarter of 2026. Quarterly GDP growth came in at 15.4% annually compared to the first quarter of the year, and 6.2% compared to the fourth quarter of 2025. These figures reflect a narrowing gap from the long-term growth trend, now standing at around 0.8%. This economic momentum has been partially driven by the aftermath of Operation Roaring Lion, launched by Israel in late February when it conducted extensive airstrikes on Iranian targets. While the operation caused initial disruption, subsequent quarters have seen a rebound in economic activity, particularly in sectors recovering from early-quarter damage. Excluding overseas operations, GDP in the second quarter was still up 3.8% compared to the fourth quarter of 2025. Labor market conditions remain strong, with employment rates for Israelis aged 25-64 reaching 78.9% in July. Participation rates hit 81.3%, showing continued engagement in the workforce. Unemployment among this demographic stands at 3.2%, consistent with pre-operation levels, while job vacancies have risen slightly to 4.5%. Nominal wage growth in the second quarter reached 6.2% compared to the prior year, driven largely by minimum wage increases and public sector pay hikes. Private sector wages, excluding tech firms, grew by 5.4% from March to May. Despite these positive signs, challenges persist. Geopolitical tensions, especially with Iran, have pushed energy prices upward, with Brent crude oil hitting $90 per barrel, a 25% increase, while European gas prices reached record highs since the start of the conflict. These developments pose risks to both inflation control and economic stability. The Bank of Israel emphasized that future interest rate decisions would depend heavily on evolving factors such as inflation trends, economic output, geopolitical risks, and fiscal policies. The central bank remains vigilant about potential shocks from global markets and regional conflicts, even as it acknowledges the current favorable economic climate. The housing market has also seen steady conditions, with apartment availability remaining stable according to recent data. However, the broader implications of sustained low interest rates on property prices and investment flows remain under observation by financial analysts and policymakers alike.