Surprise Rate Cut by Bank of Israel amidst Stable Inflation

The Bank of Israel unexpectedly decreased its short-term interest rate by 25 basis points to 4.00%, marking a second cut after November. This decision follows eased inflation rates within the government's target range and a stronger shekel, defying economists' predictions of steady rates.

The Bank of Israel made a surprising move on Monday by cutting its short-term interest rate by 25 basis points, representing its second successive reduction following a similar measure in November. The central bank's benchmark rate now stands at 4.00%, down from the previous 4.25%.

Inflation in Israel has eased to an annual rate of 2.4% by November, which comfortably falls within the government's 1-3% target range. This inflationary relief comes after two years of supply constraints fueled by the war in Gaza, which concluded in October 2025 with a ceasefire brokered by the United States.

While inflation pressures have decreased and the shekel is at a four-year high against the dollar, most economists did not foresee this rate cut. A poll by Reuters revealed that nine out of ten economists expected the central bank to maintain current rates, with only one anticipating a quarter-point reduction.