Bank of Israel interest rate

The **Bank of Israel interest rate** is the short-term monetary-policy rate set by the Monetary Committee of the Bank of Israel. It is Israel’s principal instrument for influencing inflation, credit conditions, the exchange rate and aggregate demand under the country’s flexible inflation-targeting framework.^[1][2]

Institutional setting

The interest rate is set by the Monetary Committee, the statutory monetary-policy decision-making body of the Bank of Israel. The committee was established under the Bank of Israel Law, 5770-2010, and has six members: the Governor, who chairs the committee; the Deputy Governor; another Bank employee appointed by the Governor; and three public representatives.^[2]

The committee’s functions include setting policy, including monetary policy, to achieve the Bank’s objectives; monitoring implementation of that policy; and deciding on actions that the Bank must take under the Bank of Israel Law to achieve its objectives.^[2] In practical terms, the interest-rate decision is the committee’s most visible regular monetary-policy decision, because it establishes the central bank’s stance toward inflation, economic activity and financial conditions.

The Bank of Israel describes its main function as maintaining price stability, meaning preserving the purchasing power of Israel’s currency. It states that monetary policy is primarily directed toward that objective and that the main tool of monetary policy is the effect of policy on the “price of money,” namely the interest rate.^[3] The government, in consultation with the Governor, determines the price-stability range, which the Bank identifies as annual inflation of 1–3 percent.^[3]

Policy objective and inflation targeting

Israel’s monetary-policy framework is a flexible inflation-targeting regime. The Bank of Israel is responsible for deciding the short-term interest rate required to meet the inflation target set by the government, and the Bank of Israel Law grants the Bank autonomy in that decision.^[3] The Bank also states that its flexible framework allows temporary deviations from the target, provided policy is designed to return inflation to the target range within no more than two years.^[3]

This structure means that the interest rate is not set solely by the latest monthly consumer price index reading. The Monetary Committee also evaluates inflation expectations, the exchange rate of the shekel, the state of domestic demand, labor-market conditions, fiscal policy, risk premia, global monetary conditions and geopolitical developments. The Bank’s recent interest-rate announcements have repeatedly described the policy focus as price stability, support for economic activity and stability of markets, while noting that the future interest-rate path depends on inflation, economic activity, geopolitical uncertainty and fiscal developments.^[6][7]

The inflation target gives the interest rate an anchor. When inflation pressures or inflation expectations rise above levels consistent with the 1–3 percent target range, a higher policy rate can be used to restrain demand, tighten credit conditions and support disinflation. When inflation is expected to remain within the target range and economic activity weakens, a lower rate may be used to ease financial conditions. The framework is flexible because the Bank can weigh output, employment and financial stability as long as the committee expects price stability to be maintained over time.^[3]

How decisions are made

The Bank of Israel’s published minutes describe a decision process that includes broad economic briefings and a narrower policy discussion. Before a rate decision, members of the Monetary Committee and senior Bank staff review real, monetary and financial developments in Israel and abroad. In the narrower forum, which includes the committee and a representative of the Markets Department, the Research and Markets Departments present their views on the considerations relevant to monetary policy. An open policy discussion follows and ends with a vote on the interest-rate level.^[5]

Under Section 18(c) of the Bank of Israel Law, as cited in the Bank’s published minutes, the interest-rate decision is reached by majority vote of the Monetary Committee members participating in the vote.^[5] Minutes normally summarize the economic background, the main issues discussed and the vote. For example, minutes relating to the September 28–29, 2025 discussion reported that the committee decided to keep the interest rate at 4.5 percent and that all six members supported the decision.^[5]

The committee’s decisions are communicated through formal interest-rate announcements. The Bank also publishes minutes of monetary-policy discussions and monetary policy reports. The Bank’s monetary-policy page states that its Research Department publishes a staff forecast at the end of each quarter covering expected developments in variables such as GDP, employment, inflation, the interest rate and wages; the forecast is discussed by the Monetary Committee and is published with the interest-rate decisions in January, April, July and October.^[1]

Transmission to the economy

The Bank of Israel interest rate affects the economy through several channels. The most direct is the money-market and banking channel: changes in the policy rate influence the short-term funding costs of banks and other financial institutions. Those funding costs can, in turn, affect rates on business credit, consumer credit, deposits and variable-rate borrowing.

A second channel is expectations. Because the Bank publishes announcements, minutes and forecasts, markets and households form expectations about future interest rates. If the committee signals that policy will remain restrictive until inflation is clearly within target, longer-term market rates may rise or remain elevated even before future increases occur. Conversely, when the committee lowers the rate or indicates that disinflation is becoming more established, market expectations can move toward a lower expected path for short-term rates.

A third channel is the exchange rate. Israel is a small open economy, so the shekel’s exchange rate affects import prices, inflation, exports, purchasing power and financial conditions. Bank announcements often discuss the shekel’s movements against the U.S. dollar, the euro and the nominal effective exchange rate. In its November 24, 2025 decision, for example, the committee noted that since the previous decision the shekel had appreciated by 1.3 percent against the U.S. dollar, 2.9 percent against the euro and 2.2 percent in nominal effective terms.^[6] In the January 5, 2026 decision, the Bank reported that the shekel had strengthened by 3.1 percent against the U.S. dollar, 1.5 percent against the euro and 2.2 percent in nominal effective terms since the previous decision.^[7]

A fourth channel is asset prices and risk appetite. Policy-rate changes can influence government bond yields, equity valuations, mortgage affordability, corporate financing conditions and household portfolio allocation. The Tel Aviv Stock Exchange, Israeli banks such as Bank Leumi, Bank Hapoalim, Israel Discount Bank and Mizrahi-Tefahot Bank, and savings vehicles such as keren hishtalmut and kupat gemel all operate in an environment affected by the policy rate, though the effect differs by balance-sheet structure, asset mix and liability profile.

Recent sourced rate path

The most recent sourced rate in this entry is 3.25 percent, shown on the Bank of Israel press-release page as the September 1, 2026 interest-rate announcement by which the Monetary Committee lowered the rate to 3.25 percent.^[4] This followed a series of reductions from higher levels during 2025 and 2026.

On November 24, 2025, the Monetary Committee lowered the interest rate to 4.25 percent. The announcement stated that annual inflation had moderated and stood at 2.5 percent in the previous two readings, that economic activity had recovered sharply in the third quarter, and that the policy focus remained price stability, support for economic activity and market stability.^[6]

On January 5, 2026, the committee lowered the rate to 4.0 percent. The announcement stated that economic activity continued to expand, labor-supply constraints had eased slightly and the inflation environment had declined. It also reported annual inflation of 2.4 percent after a 0.5 percent decline in the November consumer price index, and said forecasters expected inflation to decline toward around the midpoint of the target range after a slight temporary increase.^[7]

On July 6, 2026, the Monetary Committee lowered the rate to 3.5 percent. The announcement stated that inflation in May had remained around the midpoint of the target range, while uncertainty remained high. It also reported the Research Department’s forecast that GDP would grow by 4 percent in 2026 and 5.5 percent in 2027 under the assumptions described in that forecast.^[8]

On September 1, 2026, according to the Bank’s press-release listing, the committee lowered the interest rate to 3.25 percent.^[4] Because this entry is based on sources accessed for this article, that rate should be treated as the latest sourced rate here rather than a permanent statement about the current rate after September 30, 2026.

Relationship with the Bank of Israel and other policy tools

The interest rate is the central instrument of Israeli monetary policy, but it is not the only tool used by the Bank of Israel. The Bank’s financial-markets functions include implementing monetary policy through a variety of monetary tools, monitoring the foreign-exchange market and implementing exchange-rate policy.^[9] These tools can include liquidity operations and other market operations, depending on economic and financial conditions.

The interest rate is also distinct from regulatory and supervisory policy. The Bank of Israel supervises banks and supports financial-system stability, but the policy rate itself is a macroeconomic instrument rather than a rule applying to a specific bank product. Commercial banks decide their own lending and deposit rates, subject to law, competition, risk management and regulation; those rates are influenced by the policy rate but are not identical to it.

The interest rate also differs from fiscal policy, which is determined by the government and the Ministry of Finance. Fiscal policy influences monetary decisions because deficits, public spending, taxation, defense expenditure and public-debt dynamics can affect inflation, demand, risk premia and the exchange rate. Recent Bank announcements explicitly cite fiscal developments among the factors that help determine the interest-rate path.^[6][8]

Market and household relevance

For households, the Bank of Israel interest rate is relevant because it can affect variable-rate mortgages, overdraft and consumer-loan pricing, deposit returns and the value of financial assets. In a rising-rate environment, debt-service costs on variable-rate loans may increase, while deposit rates may also rise depending on bank pricing. In a falling-rate environment, borrowing costs may ease, but returns on low-risk deposits may decline.

For companies, the policy rate influences working-capital costs, investment decisions, bond issuance conditions and valuations. Firms with floating-rate debt are usually more immediately exposed than firms with long-term fixed-rate funding. Banks are affected through both sides of the balance sheet: loan yields, deposit costs, credit demand, borrower repayment capacity and securities portfolios.

For investors, the policy rate is a reference point for the risk-free or low-risk return available in shekel assets. Changes in the expected path of the Bank of Israel interest rate can affect government bonds, corporate bonds, equity valuation multiples, bank shares, exchange-traded products such as ETFs, and pension and savings portfolios. These effects are indirect and depend on expectations, inflation, risk premia, liquidity and global financial conditions.

Comparison with other central-bank policy rates

The Bank of Israel interest rate plays a role similar to other central-bank policy rates, such as the federal funds rate target range in the United States set by the Federal Reserve System or the Australian cash rate set in Australia. In each case, the policy rate is a short-term anchor for monetary conditions, but the institutional design, legal mandate, financial structure and communication practices differ by jurisdiction.

In Israel, the institutional link between the rate and the inflation target is explicit: the government determines the price-stability range in consultation with the Governor, and the Bank is responsible for deciding the short-term interest rate required to meet that target.^[3] The Monetary Committee then implements this responsibility through regular decisions, published explanations and minutes.

Interpretation and limitations

The Bank of Israel interest rate should be interpreted as a policy setting, not as a forecast of investment returns or a recommendation to borrow, lend or invest. A rate cut does not automatically mean all market rates will fall by the same amount, and a rate increase does not automatically mean all deposit or loan products will reprice immediately. Pass-through depends on competition, loan type, credit risk, funding structure, maturity, regulation and market expectations.

The rate is also backward- and forward-looking at the same time. It responds to observed data such as inflation, employment, GDP, exchange rates and financial-market conditions, but it is set based on the committee’s assessment of future inflation and economic activity. The Bank’s quarterly staff forecasts and decision statements are therefore important for understanding the reasoning behind the rate, especially when the committee acts before economic data fully reflect future risks.

Finally, the policy rate is embedded in Israel’s wider economic and geopolitical context. Recent announcements have discussed geopolitical uncertainty, fiscal developments, energy prices, the shekel exchange rate, labor-market tightness and risk premia as relevant considerations.^[6][8] For this reason, the Bank of Israel interest rate is best understood as a central, but not isolated, component of Israel’s monetary and financial system.