The end of the war between Israel and Iran has raised the question of whether the Bank of Israel will cut interest rates sooner than expected. Before the outbreak of Israel’s operation in Iran, the market estimated that the central bank would cut the interest rate in September, but now the market is pricing in a 10% probability of a cut this week, a 65% probability of a cut in August, and an interest rate level of 3.6% by next summer.
Leader Capital Markets also believes there is a chance that the Bank of Israel will cut interest rates in its upcoming decision tomorrow. In their estimation, there is a 65% chance of an interest rate cut this week, due to the decline in Israel’s risk premium and the sharp appreciation of the shekel, which has strengthened by 6.1% against the basket of currencies since the last interest rate decision.
Leaders also notes that the Consumer Price Index (CPI) in May indicated a general moderation in inflation, including in rental prices, product prices, and service prices. Alongside this, core inflation excluding government intervention (VAT, etc.) moderated to 2.5% from 2.9%, close to the center of the Bank of Israel’s price stability target. Leader also notes that “pre-war indicators point to moderation, according to the composite index (+0.1% in May, stagnation since December 2024) and according to credit card purchase data (annual rate of 1.3% in February-April)”. Finally, Leader also refers to the rest of the global environment as a factor that is expected to support an interest rate cut: “Since the last interest rate decision, most central banks in the world (except the US Fed) have cut interest rates or are signaling an interest rate cut”.
“The Bank of Israel will wait for inflation to converge towards the target”
Other institutional investors like Meitav and Phoenix do not expect interest rates in Israel to fall until September. Matan Shitrit, Phoenix’s chief economist, says, “Will we see an interest rate cut tomorrow? In our opinion – the answer is no. We are not betting on a reduction for August either, at least not with high probability, although we would be happy to be surprised. The main reason – the approach of dependence on the latest data and not on forward expectations (Data Dependent), when annual inflation is still above the upper target limit, and is expected to remain so in the August decision. On the other hand, it is easier for us to bet on September, since the Bank of Israel is expected to see annual inflation within the target, and if the stars align, perhaps the Fed will also take the first step by then.
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Is a BoI interest rate cut on the cards?
Bank Hapoalim chief financial markets strategist Modi Shafrir agrees with Shitrit and believes that the interest rate tomorrow will remain unchanged, “But due to the sharp appreciation of the shekel and the decline in inflation expectations, the Bank of Israel is expected to hint at a cut in interest rates in the coming months (August or September).”
Published by Globes, Israel business news – en.globes.co.il – on July 6, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
