Bank of Israel Governor Prof. Amir Yaron delivered a surprise Monday by lowering the interest rate by 0.25% to 4%, resulting in green screens in the Tel Aviv Stock Exchange. The move signals the central bank's confidence in forecasts showing inflation stabilizing firmly within the 2% price stability target. While current trading on the stock exchange reflects expected inflation of 1.9%, bank economists project an even lower figure of 1.8% for the year. The stock exchange responded to the central bank's unexpected announcement with a surge of approximately 3% immediately following the announcement in the major indices.
The Bank of Israel's Research Department also released its updated forecast today, estimating that growth in 2025 totaled 2.8% – representing positive per capita growth, a critical indicator. The department projects that growth will accelerate significantly in 2026, reaching 5.2%, before moderating to 4.3% in 2027. The Bank of Israel also revised its annual inflation forecast downward to an excellent 1.7%.
In detailing the reasoning behind the cut, members of the Monetary Committee noted that the inflation environment has moderated. The Consumer Price Index dropped by 0.5% in November, placing annual inflation at 2.4%. While forecasters expect a slight uptick in the annual rate in the December index, they predict it will subsequently decline toward the center of the target range.
"Since the last interest rate decision, the shekel has strengthened by a rate of 3.1% against the dollar, and by 1.5% against the euro. In nominal effective terms, the shekel appreciated by 2.2%," the bank stated. "The labor market remains tight, but in the end data, there is an indication of an easing in supply constraints. This is reflected in an increase in participation and employment rates, a decrease in the rate of absentees due to reserve duty service, and a decrease in the rate of wage increases in the business sector. Domestic stock indices rose and stood out positively relative to the world. The risk premium, as expressed in the CDS spread, is close to its level prior to the war."
Finance Minister Bezalel Smotrich praised the decision. "Our correct and professional conduct as a government lowers the deficit and inflation and increases growth," Smotrich said. "Lowering the interest rate is what is required right now – both for growth and for easing the burden and lowering the cost of living for the citizens of Israel."
