The Central Bank of BH lowered its benchmark interest rate from 5.00% to 4.75% on October 29, 2025, matching market consensus. This marks a 100 basis point decline since September 2024, when rates stood at 5.75%. The easing cycle reflects a response to slowing inflation and softer economic growth signals. The decision aims to support domestic demand while balancing inflation risks amid external uncertainties.

Drivers this month

• Inflation eased to 3.20% YoY in September, down from 4.10% in July.
• GDP growth slowed to 1.80% YoY in Q3 2025, below the 2.50% average of the past year.
• Unemployment remained stable at 6.50%, indicating moderate labor market slack.

Policy pulse

The 4.75% rate sits below the 12-month average of 5.25%, signaling a clear accommodative tilt. The Central Bank’s inflation target remains 3.00%, and the latest easing reflects confidence that inflation is converging toward this goal without overheating the economy.

Market lens

Immediate reaction: The BH currency (BHD) depreciated 0.30% against the USD within the first hour post-announcement, while 2-year government bond yields fell 15 basis points, reflecting dovish sentiment.

Core macroeconomic indicators underpin the Central Bank’s decision. Inflation has moderated steadily from a peak of 5.60% in early 2024 to 3.20% in September 2025. Meanwhile, GDP growth decelerated from 3.10% YoY in Q1 2024 to 1.80% in Q3 2025, reflecting weaker external demand and subdued investment.

Monetary Policy & Financial Conditions

The interest rate cut to 4.75% follows a series of reductions starting from 5.75% in September 2024. Financial conditions have eased accordingly, with lending rates dropping by 40 basis points on average. Credit growth remains positive but slowed to 4.50% YoY, down from 6.20% a year ago.

Fiscal Policy & Government Budget

Fiscal policy remains moderately expansionary, with the government running a 2.80% of GDP deficit in 2025, slightly wider than the 2.30% deficit in 2024. Increased infrastructure spending aims to offset external headwinds but raises concerns about debt sustainability, with public debt at 58% of GDP.

External Shocks & Geopolitical Risks

Global commodity price volatility and regional geopolitical tensions have pressured BH’s export sector. Oil prices, a key export, declined 12% over the past six months, impacting trade balances. Geopolitical risks in neighboring regions add uncertainty to capital flows and investor sentiment.

Financial market indicators mirror this trend. The 2-year government bond yield dropped from 5.10% in September to 4.85% in October, while the BH currency weakened modestly against the USD. Credit spreads narrowed by 10 basis points, signaling improved liquidity conditions.

Market lens

Immediate reaction: The BH currency depreciated 0.30% versus USD, while short-term yields declined sharply, indicating market confidence in the easing cycle but caution about growth prospects.

Looking ahead, BH’s monetary policy trajectory will depend on inflation dynamics, growth momentum, and external shocks. Three scenarios emerge:

Bullish scenario (30% probability)

• Inflation falls below 3.00% by Q1 2026.
• GDP growth rebounds to 3.00% YoY by mid-2026.
• Further rate cuts to 4.25% to stimulate investment.

Base scenario (50% probability)

• Inflation stabilizes around 3.00% through 2026.
• Growth remains modest at 2.00% YoY.
• Monetary policy on hold after current easing.

Bearish scenario (20% probability)

• Inflation surprises upward due to supply shocks.
• Growth stalls below 1.00% amid geopolitical risks.
• Potential rate hikes in late 2026 to contain inflation.

Structural & Long-Run Trends

BH faces structural challenges including dependency on commodity exports and fiscal deficits. The interest rate easing reflects a short-term response, but long-run growth will require diversification and fiscal consolidation. Demographic shifts and technological adoption also shape the medium-term outlook.

The October 2025 interest rate cut to 4.75% marks a decisive shift toward monetary accommodation in BH. Supported by easing inflation and slowing growth, the Central Bank aims to balance growth support with price stability. External risks and fiscal pressures remain key uncertainties. Market reactions reflect cautious optimism, with currency depreciation and lower yields signaling confidence in the easing cycle. Policymakers must remain vigilant to inflation surprises and geopolitical developments.

Key Markets Likely to React to Interest Rate Decision

The interest rate decision will notably impact several markets. The BHDBHD currency pair is sensitive to rate changes, typically depreciating on cuts. The BHSTK equity index often rallies on easing, reflecting improved corporate financing conditions. The BHCRYPTO crypto market shows volatility linked to monetary policy shifts. Additionally, the USDUSD pair influences BH’s external trade balance, while the INTL international stock index reflects global risk sentiment affecting BH’s export sector.

FAQs

What is the significance of BH’s latest interest rate cut?

The cut to 4.75% signals a shift toward supporting growth amid easing inflation, balancing economic risks.

How does the interest rate decision affect BH’s currency?

Lower rates typically weaken BH’s currency, as seen in the 0.30% depreciation post-announcement.

What are the risks to BH’s monetary policy outlook?

Risks include inflation surprises, geopolitical tensions, and fiscal pressures that could force policy tightening.

Key takeaway: BH’s interest rate easing reflects a cautious pivot to support growth while monitoring inflation, with external risks shaping the policy path ahead.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.

Updated 10/30/25