Bank of Israel cuts rates for a second time, signals a dovish stance; 2026 growth forecast revised higher

ISRAEL - In Brief 05 Jan 2026 by Sani Ziv

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Contrary to market expectations, the Bank of Israel surprised with a second consecutive rate cut. As we noted yesterday, the prevailing macroeconomic conditions supported further easing, leaving little justification for keeping rates at their current level. The policy statement conveyed a more dovish stance than in November and outlined several factors supporting continued monetary accommodation. The primary driver behind the rate cut was the continued easing in inflation. Headline CPI inflation stood at 2.4% year-over-year in November, namely within the government’s target range. According to the Bank of Israel Research Department’s updated forecast, and assuming the ceasefire holds, inflation is expected to average 1.7% over the coming year and 2.0% in 2027. Additional disinflationary forces include a decline in Israel’s risk premium, rising equity markets, and, most notably, a sharp appreciation of the shekel. Since the November rate decision, the shekel has strengthened by 3.1% against the U.S. dollar and 1.5% against the euro, exerting further downward pressure on prices. Developments in the housing sector also support a more accommodative stance. Home prices have continued to decline for several months, annual housing starts have increased, but transaction volumes have softened, and the stock of unsold homes remains high. In this environment, construction activity remains relatively elevated, and lower interest rates could help stimulate demand. Finally, conditions in the labor market appear to be easing gradually. Until recently, the Bank of Israel viewed labor market tightness as one of the main constraints on further rate cuts. However, the bank now points to ...