Despite forecasts of a rate cut, the Bank of Israel’s Monetary Committee announced on Monday that the Israel interest rate will remain unchanged at 4.5%. In its statement, the Bank explained that “given the ongoing geopolitical uncertainty, the path of the Israel interest rate will be guided by how inflation aligns with its target.”

Market expectations that the Bank of Israel’s Monetary Committee would lower the Israel interest rate—given the strengthening of the shekel and the slowdown in inflation—proved unfounded. On Monday, the Committee opted to keep the rate unchanged. The last time the Bank cut the interest rate was in January 2024, reducing it from 4.75% to 4.5%, shortly after the outbreak of the Swords of Iron war.

In its interest rate announcement, the Bank of Israel stated: “Given the ongoing geopolitical uncertainty, the path of the Israel interest rate will be guided by how inflation aligns with its target, the stability of financial markets, economic activity, and fiscal policy.” The Bank also noted that “economic activity continues to recover at a moderate pace, despite significant local and global uncertainty. Annual inflation has slowed but still exceeds the upper limit of the target range. Since Operation Rising Lion, Israel’s risk premium has dropped significantly, though it remains elevated compared to its level before the Swords of Iron war. Local stock indices have climbed sharply, government bond yields have fallen steeply, and the shekel has strengthened noticeably.”

“The Consumer Price Index declined by 0.3% in May, bringing annual inflation down to 3.1%—just above the upper limit of the target range. In recent months, inflation has been marked by volatility and significant uncertainty. When excluding energy and fresh produce, the annual inflation rate stood at 3.5%, still above the target ceiling… Forecasters expect inflation to return to the target range in the coming months.” According to the announcement, the Monetary Committee identified several risks that could either accelerate inflation or delay its convergence to the target, including “geopolitical developments and their impact on economic activity, rising demand coupled with supply constraints, and a deterioration in global trade conditions.”

The Mortgage Advisors Association responded to the decision, saying: “Although the Bank of Israel chose to hold off on a rate cut, the economy is showing clear signs of stabilization: slowing inflation, improved financial stability, and stronger confidence indicators—all of which support the expectation of a rate cut in the coming months.”

Ofer Aharonovitch, head of the mortgage division at Eldar Mortgages, said: “The Bank of Israel Governor left the interest rate unchanged at 4.5%, a decision that reflects a delicate balance between a slowdown in inflation and ongoing security and geopolitical risks. Annual inflation dropped to 3.1%—progress toward the target, but still above it. At the same time, growth forecasts remain positive—around 3.4%—but are contingent on regional stability. We may see a rate cut as early as August, provided the positive trend continues and the security situation doesn’t escalate. In the mortgage market, we continue to see uncertainty, but also some stabilization in fixed rates, creating an interesting entry point for buyers.”

Gilad Oren, CEO of Matzlawi Building Company, commented that the Monetary Committee’s decision “is based on an inflation environment that remains relatively high and the ongoing economic uncertainty that the Israeli economy faces during wartime. Key factors behind the decision include sharp price increases in the food market, rising rental prices in major cities, and significant hikes in airfare—all of which create sustained inflationary pressure, complicating a shift toward expansionary monetary policy.”

“Despite the desire to ease pressure on the public and businesses, the Bank of Israel opted to prioritize economic stability and the fight against inflation. If the downward trend in the Consumer Price Index continues and the shekel continues to strengthen against the dollar, there is a real chance we’ll see a rate cut at the next decision.”

Dror Ohev Zion, CEO and owner of DARA Real Estate Marketing, commented on the decision, saying: “The decline in inflation brings the index closer to the Bank of Israel’s target range of 2–3% and signals a slight cooling in economic activity. The strengthening of the shekel also helps ease inflationary pressures, particularly on imported goods—as several economists have recently pointed out. Given the current conditions, it would be appropriate to begin a gradual and measured reduction of the Israel interest rate in upcoming decisions. Such steps could help ease the burden on households with costly mortgages, revitalize both the private and commercial real estate markets, and support a broader economic recovery, which has been hindered by recent security and economic uncertainty.”