Bank of Israel cuts benchmark rate to 4.25 percent, first reduction since January 2024

The Bank of Israel announced a 25 basis point reduction in its benchmark interest rate to 4.25 percent, ending a prolonged period of policy stability that has lasted since January 2024. The central bank framed the decision as a data dependent adjustment, saying future policy will hinge on incoming economic indicators, wage pressures and geopolitical risks.

Israeli inflation has moderated in recent months, with October readings reported near the central bank’s 1 to 3 percent target range. The easing in consumer price pressures followed heightened uncertainty from hostilities earlier in the year and a U.S. brokered ceasefire in Gaza last month, which reduced acute supply and logistical disruptions that had pushed some prices higher. The Bank of Israel signaled that the return of inflation toward its target range created room to begin easing monetary policy after almost two years without cuts.

Market participants and several domestic industry groups welcomed the rate cut as a boost to growth and competitiveness. Lower borrowing costs are expected to reduce interest expenses for businesses and households, ease conditions for investment and housing, and potentially improve the price competitiveness of Israeli exporters. The central bank cautioned however that the cut should not be interpreted as a permanent shift toward aggressive easing, arguing that the path ahead will be shaped by wage dynamics and the evolution of regional tensions.

Policy makers in Jerusalem face a familiar trade off. On one hand, a reduction in the policy rate can revive business activity and alleviate pressure on highly leveraged households. On the other hand, sustained wage growth or a fresh supply shock could rekindle inflationary pressures and force a reversal. The Bank of Israel made clear it will monitor wage growth and labor market tightness closely as part of its assessment.

This rate move fits within a broader global pattern of central banks recalibrating policy as inflation declines from multi year highs. Since 2022 many advanced economy central banks have shifted from rapid tightening toward more cautious stances, weighing signs of disinflation against the risk of reignition. For Israel, the new policy stance also intersects with a complex geopolitical environment that could quickly alter costs and confidence for businesses and consumers.

For financial markets and the real economy the immediate effects will depend on how businesses and lenders respond. If the cut relieves financing constraints and supports investment it could translate into stronger growth in early 2026. Conversely, if wage pressures rise or geopolitical disruptions return, the central bank has signaled it will not hesitate to adjust rates back upward. The Bank of Israel’s decision marks a cautious step toward easing, but it leaves the door open to further action in either direction depending on how incoming data evolve.