Bank of Israel cuts rates to 3.25% in a somewhat unexpected move

ISRAEL - In Brief 02 Sep 2026 by Sani Ziv

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The Bank of Israel cut its policy rate by 25bp to 3.25%, its third consecutive rate cut. The decision was somewhat surprising. As we noted ahead of the meeting, when the decision when the decision is not clear-cut, the Bank of Israel has generally tended to err on the side of caution. This time, however, three developments appear to have tilted the balance in favor of another cut: more moderate growth excluding Nvidia-related production abroad, a moderation in current activity indicators, and the strong shekel. What changed since the July decision? When we compare the September statement with the July statement, the tone is significantly more dovish, even though the bank also cut rates in July. In July, inflation stood at 1.9%, economic activity was described as continuing to recover, credit-card spending was above trend and wage growth was running at 6.8%. The latest statement is more dovish on both inflation and activity: Inflation has fallen to 1.5%, credit-card spending is slightly below trend, several business indicators remain below their pre-March levels, and the bank places much greater emphasis on the weakness of growth once production abroad is excluded. In particular, the bank emphasizes that while headline GDP in the second quarter was 6.2% above its Q4 2025 level , the GDP was only 3.8% higher in annualized terms when excluding production abroad by Israeli companies. Regarding exchange-rate and risk premium, the bank reinforces its assessment that financial risks have normalized significantly, noting that the risk premium remains close to its pre-October 7 level. The spread between Israel's dollar-denominated government bonds and U.S. Treasuries also decli...