Israel’s central bank has shifted the mood for 2026 with a fresh easing step. The message is simple: price pressures look less threatening, and policymakers see room to support activity without losing control of inflation. The next few months will test whether that calmer narrative can survive real-world politics and data.
Back-to-back cuts mark a clear pivot
On January 5, 2026, the Bank of Israel’s Monetary Committee cut the benchmark interest rate. It moved by 25 basis points, which is 0.25 percentage points, to 4.00%. Markets mostly expected no change. This was the second consecutive cut after November, and the first back-to-back easing in nearly two years.
The benchmark rate is the central bank’s headline price for short-term money. When it falls, borrowing tends to get cheaper over time. When it rises, credit tightens.
A consecutive move also shifts expectations. It signals that inflation risks look less urgent than before, at least in the Bank’s current assessment.
Why did the Bank move now?
Officials pointed to a clear cooling in prices. November’s Consumer Price Index is the main gauge of household inflation. It put annual inflation at 2.4%, inside the Bank’s 1% to 3% target range. The Bank also cited a stronger shekel and easing labor and supply constraints since the Gaza ceasefire.
Being inside the target band matters. It suggests policy can be less restrictive without abandoning the mandate to protect price stability.
A firmer currency can lower the local cost of imports. Easing bottlenecks can also reduce pressure on prices and wages.
Staff forecasts sketch the path ahead
In parallel with the decision, the Bank of Israel published a staff forecast. It projects inflation drifting down toward about 1.7% over the coming year. The same outlook sees the policy rate averaging roughly 3.5% by the fourth quarter of 2026, if current trends continue.
This forecast is the Bank’s baseline map under an assumed scenario. It is conditional, not a commitment.
One practical implication follows by simple subtraction. The projected rate level is about half a percentage point below the new setting, which implies additional easing could be consistent with the baseline.
Can fiscal uncertainty derail the easing cycle?
The next monetary policy decision is scheduled for February 23, 2026, and the Bank’s leadership is already signaling what could cloud the outlook: fiscal uncertainty. Officials have urged lawmakers to pass the 2026 state budget. They warned that unclear spending and revenue plans can make it harder to steer inflation and keep markets stable.
For a central bank, fiscal policy is not background noise. It shapes confidence and can influence inflation expectations.
Israel’s advantage is institutional credibility. Clear fiscal planning can reinforce that credibility, and support a steadier policy path.
Borrowers may feel relief, but conditions matter
For households and firms, a lower policy rate is not a theory. It anchors borrowing costs across the economy, from mortgages to business credit. The pace of relief depends on contracts and lender pricing. Still, the direction matters, because it can ease financing pressure and change the psychology of big decisions.
The key question is durability. If inflation stays contained, easing can continue. If risks reappear, the Bank can pause without hesitation.
Glossary
The Monetary Committee is the decision-making body at the Bank of Israel that sets monetary policy, including changes to the interest rate.
The benchmark interest rate is the central bank’s policy rate, which influences borrowing costs, savings returns, and overall financial conditions across the economy.
A basis point is one hundredth of a percentage point. It is used to describe small, precise changes in interest rates, such as a 25 basis point move.
The Consumer Price Index measures average price changes over time for a basket of goods and services purchased by households and is the primary gauge of inflation.
The inflation target range is the band within which the central bank aims to keep inflation over the medium term to support price stability.
A staff forecast is the central bank’s internal macroeconomic projection. It serves as a baseline scenario for policy discussions and decision-making.
Fiscal uncertainty refers to unclear or disputed government budget plans, which can affect financial markets, economic confidence, and inflation expectations.
How this was reported
This report relies only on the Bank of Israel’s official rate communication and its published research staff forecast, alongside Reuters’ account of the decision and the stated rationale.
FAQ
Q: What does a benchmark interest rate actually change?
A: It influences the price of credit across Israel. Banks use it when they set loan and deposit rates. The pass-through can be slow, but the signal is strong.
Q: Why do central banks speak in basis points?
A: It is a standard unit that reduces ambiguity. Small rate moves are easier to communicate precisely when everyone uses the same scale.
Q: What does it mean when inflation is inside the target range?
A: It suggests price growth is within boundaries the central bank considers tolerable. That can open room for policy to support activity while protecting stability.
Q: What is a staff forecast, and how should it be read?
A: It is a baseline scenario under an assumed set of conditions. It shows how policymakers see risks and trends. It is not a promise of future decisions.
Q: Why does fiscal policy matter to monetary policy?
A: Budget choices can affect confidence and inflation expectations. When fiscal planning is unclear, the central bank may need to stay more cautious.
Q: How quickly do households feel a rate change?
A: It depends on the contract. Variable-rate products adjust faster than fixed-rate ones. Many borrowers feel changes gradually, not all at once.
Final takeaways
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The Bank has signaled more confidence in the inflation backdrop.
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Policy has shifted toward easing, but the tone remains cautious.
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The published forecast implies a lower-rate direction if conditions persist.
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Fiscal decisions and incoming data will test that direction.
