The Bank of Israel will deliver its latest interest rate decision next Monday in the wake of the US Federal Reserve’s decision last week to cut rates by 0.25%.
Citi research department writes, “Our forecast is that the Bank of Israel will leave the interest rate unchanged in the decision expected next week.” A document for investors seen by “Globes,” says “Although this is not a closed and clear decision as in previous times, higher-than-expected inflation, the halt of the loosening in the job market, and the uncertainty regarding the latest developments in the Gaza operation, all make an interest rate cut on Monday unlikely.”
“Not much weight should be attached to forecasts”
In the upcoming decision, the Bank of Israel’s research department will also publish the quarterly macroeconomic forecast. Citi stresses, “Since forecasts on the Israeli economy become outdated very quickly in the current environment, not much weight should be attached to these updates, although changes in assumptions on inflation and interest rates will be carefully examined in terms of the narrative.” In other words, a change in the Bank of Israel’s key assumptions on inflation, growth, or the job market will attract investor attention, while specific changes in nominal estimates will receive less attention.
According to Citi’s economists, most focus will be on the tone that the Bank of Israel adopts in the interest rate announcement or in the Governor’s press conference after it. However, Citi “does not expect significant innovations in either.” Citi is reviewing the macroeconomic data of the Israeli economy and discussing the question of when the Bank of Israel will need to follow the global trend of interest rate cuts. According to Citi, the picture is now complicated by the high uncertainty. “The monetary direction in Israel is becoming less self-evident,” Citi notes, adding, “For most of 2024 and 2025, maintaining interest rates at a high level served both as a tool to stabilize the risk premium in the markets and as a means to prevent further acceleration of inflation. However, risk premiums have decreased significantly, and the shekel has strengthened accordingly in recent months.”
Citi stresses that annual inflation returned to the Bank of Israel’s target range (3% is the upper limit) last month, with an annual rate of 2.9%. “This is despite the VAT increase that adds 0.4-0.6% to all of 2025,” Citi notes.
“Will only cut interest rates when it has to”
In conclusion, Citi observes that the data supports an interest rate cut soon. “In terms of momentum, most components of the Consumer Price Index basket have shown relatively moderate price increases. The job market remains tight, but less than the situation at the beginning of the year. At the same time, the European Central Bank (ECB) has reduced interest rates significantly in recent quarters, and the US Federal Reserve has already begun its own interest rate cut cycle. All of this indicates that the Bank of Israel may be in a position to begin interest rate cuts at one of the upcoming meetings.” However, Citi believes that the Bank of Israel will take a conservative position. “We estimate that the bank will cut interest rates when it must, not when it can.” The reasons for this are similar to those voiced more than once by the governor, Prof. Amir Yaron, in recent months. “GDP growth is moderate by Israeli standards, but remains positive. The constraints on the economy are mainly on the supply side, while demand indicators – such as credit card use – are more or less in line with long-term trends. The bank has emphasized this gap many times, and there is no reason to assume that its position has changed precisely now, when reserve mobilization has intensified again following the operation in Gaza.” Citi adds that “there is a high probability that inflation will again cross back above the 3% target range this year and will remain around it until the end of the year. The housing component of the index may pose an upward risk for several more months, and the Bank of Israel, in our assessment, is particularly sensitive to this parameter.”
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The bottom line, according to Citi, is that risks and uncertainties will be the decisive. “Due to geopolitical risks, supply constraints and fiscal challenges, we estimate that the Bank of Israel will continue to pursue a cautious and calculated policy, with the main focus of this approach being on preventing risks of rising inflation.”
Baseline scenario – interest rate cut in February
When will the Bank of Israel cut interest rates for the first time since January 2024? According to Citi economists, probably not soon. “We are moving our base scenario for the next interest rate cut to February. In our opinion, the burden of proof is on the need for an interest rate cut, not on the possibility of doing so. In other words, unless we see a significant change on Monday, the default scenario for us is to resume the cuts only when inflation returns more stably to the target range. In our forecasts, this is expected to occur only in early 2026.”
Published by Globes, Israel business news – en.globes.co.il – on September 25, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
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