The Bank of Israel on Monday cut borrowing costs for the first time in almost two years, following last month’s ceasefire agreement with the Hamas terror group in Gaza, and as inflationary pressures have been easing.
Citing a moderate inflation environment and a recovery in economic activity, the central bank lowered interest rates by 25 basis points to 4.25% from 4.5%. The Bank of Israel last reduced the key lending rate in January 2024 to support households and businesses as the economy was getting battered by the war with Hamas in Gaza, triggered by the October 7, 2023, onslaught.
“With the stability of the economy, the somewhat stabilizing geopolitical situation, and with Israel’s risk premium declining substantially after the 12 days of war with Iran in June, we saw the opportunity to lower interest rates, which is consistent with keeping inflation within the center of our target and maintaining financial stability,” Dr. Adi Brender, head of the Bank of Israel’s research department, told The Times of Israel in a phone interview.
“Looking ahead, the geopolitical environment is unstable, although currently there seems to be somewhat more mitigated fighting on all fronts, but still, the risks are there,” Brender cautioned. “We take a very cautious approach about the interest rate path looking forward, which will depend a lot on the developments, both on the geopolitical front and on the fiscal front.”
According to the Bank of Israel’s current macroeconomic forecast, the interest rate is expected to fall by a cumulative 0.5% to 3.75% by September 2026, assuming a stable geopolitical environment and sound fiscal situation.
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“It’s important for people to realize that we are not likely to embark on a path that goes back to those very low close to zero interest rates that we saw in the pre-COVID period,” Brender said.
Bank of Israel’s head of research department Dr. Adi Brender. (Courtesy of Bank of Israel spokesperson division)
Monday’s decision was taken by the central bank’s monetary committee, led by Bank of Israel Governor Amir Yaron. Ahead of the decision, the majority of economists were in consensus that the central bank would lower interest rates as consumer prices continued to moderate in recent months. Israel’s annual inflation rate held steady in October at 2.5%, and remained within the government’s 1%-3% annual target range for a second consecutive month.
Yaron has come under fierce scrutiny by politicians and manufacturers for hesitating to lower high borrowing costs as households and businesses struggle to make mortgage and loan repayments during the two-year war with Hamas in Gaza. Finance Minister Bezalel Smotrich threatened to lower taxes if the central bank did not start cutting interest rates to ease the pressure on borrowers.
“When we look at the data, we don’t see pressure from the financial front,” said Brender. “We do not see people getting into difficulties in repayment of loans, both for housing and non-housing loans.”
“There’s an expansion of credit for the business sector, so in that respect, there is also no sense of urgency,” he remarked.
A lower interest rate path will come as a relief to some existing and potential mortgage borrowers and households with loans in Israel tied to variable prime rates of the Bank of Israel.
“The interest rate cut is expected to reduce the prime rate and provide some relief for mortgage holders, especially borrowers with a significant prime component,” said Ofer Aharonovich, partner and manager of the mortgage division at Eldar Mortgages. “Still monthly savings will be limited, but we can expect some revival in mortgage activity and the return of some buyers who hesitated in the past year.”
“However, a fundamental change in the mortgage market will require a series of interest rate cuts, not just a one-off move,” Aharonovich noted.
Construction in the southern Israeli city of Sderot, July 28, 2025. (Yossi Aloni/FLASH90)
Ori Mor, co-founder of Mor-Langermann Investment Banking, said the interest rate cut is more of a “symbolic” step and reflects a shift in sentiment.
“A single cut will not dramatically lower mortgage payments or significantly reduce loan costs,” said Mor. “But if the cut becomes the first in a gradual series, households will begin to feel the difference: mortgage repayments on prime-linked loans will decline, interest burdens on consumer credit will ease, and access to financing may improve.”
“These effects accumulate slowly, but translate into meaningful long-term savings,” he added.
Similarly, Yaniv Pagot, vice president of trading at the Tel Aviv Stock Exchange, said that “a one-time interest rate reduction is not significant news, as interest rates are still very high, and credit is expensive — and therefore the market expects continuity.”
Looking ahead, fiscal uncertainty over government spending in the 2026 state budget and geopolitical risks are expected to dictate the central bank’s timing and path for further interest rate cuts.
Ori Mor, co-founder of Mor-Langermann investment banking. (Courtesy)
“The Bank of Israel is very conservative, and it can be assumed that in upcoming interest rate decisions, increasing weight will be given to the approval of the 2026 budget, political stability, and geopolitical stabilization,” said Pagot.
While the US- and Israeli-led mechanism monitors the Gaza ceasefire that went into effect on October 10, ending two years of bitter war that erupted with the Hamas invasion of Israel on October 7, 2023, the next phase of the plan is yet to be agreed upon.
Israel has been escalating its strikes on Iran-backed Hezbollah in recent weeks, accusing the terror group of violating the year-old ceasefire and increasingly attempting to rebuild its capabilities. On Sunday, Israel said it had killed Hezbollah’s military chief of staff, Haytham Ali Tabatabai, in a targeted airstrike in the southern suburbs of Lebanon’s capital, Beirut.
“There are several risks of renewed acceleration of inflation: geopolitical developments and their impact on economic activity, an increase in demand alongside supply constraints, and fiscal developments,” the central bank cautioned.
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