The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has unexpectedly cut the interest rate from 4.25% to 4%, despite the economists' consensus, which saw the central bank leaving the rate unchanged. This is the second consecutive cut after the Bank of Israel Monetary Committee cut the rate by 0.25% at its previous meeting at the end of November. That was the first rate cut since the start of 2024.
On inflation, the Bank of Israel said, "The inflation environment has moderated. The Consumer Price Index (CPI) for November declined by 0.5%, and annual inflation is 2.4%. Forecasters project that there will be an increase in annual inflation in the December CPI reading, and that it will then decline to around the midpoint of the target range (1%-3%).
On the shekel the Bank of Israel said, "Since the previous interest rate decision, the shekel has strengthened by 3.1% against the US dollar, by 1.5% against the euro, and by 2.2% in terms of the nominal effective exchange rate.
The Bank of Israel Research Division has updated its macroeconomic forecast, after its previous forecast was published in September at the height of the war in Gaza. The forecast assumes that the ceasefire will hold and the number of army reservists will continue to decline. The Research Division estimates that during the forecast period, supply-side constraints will gradually decrease, with a measured increase in domestic demand so that excess demand will be mitigated.
According to the Research Division's estimate, GDP grew by 2.8% in 2025, and GDP is expected to grow by 5.2% and 4.3% in 2026 and 2027, respectively. In 2026 and 2027, the broad unemployment rate in the prime working age population (25-64) is expected to average 3.3% and 3.5%, respectively.
The inflation rate in 2025 is predicted to be 2.5% compared with 3% in the September forecast, and in 2026 and 2027 to be 1.7% and 2% respectively. The budget deficit estimate in 2025 is 4.8% of GDP and in 2026 to be 3.9%. Public debt is expected to be about 68.5% of GDP in 2025, 2026 and 2027. Although this forecast is characterized by a lower level of uncertainty following the ceasefire, the risks to the forecast are still considerable.