Jerusalem, September 29, 2025 — The Bank of Israel left its benchmark interest rate unchanged at 4.5% on Monday, marking the 14th consecutive policy meeting without a shift. The decision reflects policymakers’ balancing act between persistent inflation risks and an economy strained by the ongoing conflict in Gaza.
In its accompanying staff forecast, the central bank projected a gradual easing cycle ahead, with the policy rate expected to average around 3.75% by the third quarter of 2026—provided inflation continues to moderate toward the government’s 1–3% target range.
Inflation and Growth Outlook
The Bank noted that inflation remains near the upper edge of the target band, with risks skewed upward due to supply chain disruptions and elevated fiscal spending. Meanwhile, GDP growth in 2025 is forecast to soften, reflecting weaker investment activity and consumer sentiment under the shadow of war.
Mortgage and Lending Impact
The decision effectively prolongs a period of elevated borrowing costs for households and businesses. Mortgage rates remain high, slowing housing demand, while developers and investors face tighter credit conditions. Analysts say the Bank’s cautious language indicates cuts may come slower than markets initially anticipated.
External Pressures
Fiscal pressures from increased defense spending and persistent geopolitical uncertainty have limited the Bank’s room to maneuver. “The central bank is walking a tightrope,” said one economist. “It wants to ease conditions to support growth but must ensure inflation doesn’t become entrenched.”
Market Reaction
Markets responded cautiously, with shekel volatility contained and bond yields reflecting expectations of gradual—not aggressive—rate cuts in 2026. Analysts at Capital Economics warned that the Bank’s forecast could prove optimistic if inflation proves sticky, leaving Israel with elevated real rates well into next year.
