The Bank of Israel reduced its key interest rate to 3.5% from 3.75% on Monday, marking the second straight meeting in which policymakers eased monetary policy. The central bank highlighted stable inflation readings and a drop in energy costs following a U.S.-Iran ceasefire as principal factors behind the decision.
The move was broadly anticipated by market participants. The bank had earlier trimmed rates in November and January after the Gaza war began, then paused that easing cycle across the next two meetings amid conflict with Iran and worries about potential supply-driven upward pressure on prices. Rate reductions resumed in May and continued with the decision on Monday.
Inflation in Israel remained at an annual 1.9% in May, holding comfortably within the Bank of Israel's stated 1% to 3% target range. In published projections, central bank staff now expect inflation to be about 1.8% by the end of 2027. Using those forecasts, staff estimates indicate the policy rate could fall to 3% over the coming year.
In its rate decision statement, the monetary policy committee said it will continue to follow inflation developments closely, noting that a range of competing factors could affect future price trends. The committee thus framed the cut as responsive to current stability in prices and the easing of energy-related pressures while maintaining vigilance over uncertain influences that might push inflation in other directions.
Context and sequence of policy moves
The recent reduction continues a pattern of measured easing that began after the onset of the Gaza war and was interrupted by concerns tied to conflict with Iran and its potential effects on supply and prices. Policymakers opted to pause the easing path for two meetings before resuming cuts in May and proceeding with Monday's decision.
Outlook provided by staff forecasts
Bank staff projections released with the decision point to lower inflation by the end of 2027 and suggest additional room for policy accommodation, with a potential decline in the benchmark rate to 3% within the next year if the forecasts hold.
The central bank's statement underlined both the current assessment of subdued inflation and the continued uncertainty posed by multiple factors that could change price developments going forward.