FX.co ★ Israel Slashes Key Policy Rate to 3.5% as Forecast

The Bank of Israel cut its policy rate by 25 basis points to 3.50% at its July 2026 meeting, as widely expected, marking a second consecutive reduction and bringing the rate to its lowest level since 2022. The move reflected stable inflation and an easing of geopolitical risks following the signing of a memorandum of understanding between the US and Iran. Policymakers highlighted that inflation in May remained close to the midpoint of the target range, while Israel’s risk premium retreated to levels last seen before October 2023. Annual inflation held at 1.9% in May 2026, unchanged from April and from May of the previous year, and comfortably within the Bank of Israel’s 1%–3% target band. The central bank noted that recent data signal a continued economic recovery after the slowdown triggered by the initial phase of the conflict with Iran. GDP is forecast to grow by 4.0% in 2026 and 5.5% in 2027, while the fiscal deficit is projected at 4.9% of GDP in 2026 and 4.2% in 2027, assuming defense spending does not rise further.