Israel Interest Rate Decision: November 2025 Analysis and Outlook
Key Takeaways: The Bank of Israel cut its benchmark interest rate by 25 basis points to 4.25%, marking the first reduction since early 2025. Inflation pressures have eased moderately, but core inflation remains above target. Economic growth shows signs of slowing amid global uncertainties and geopolitical tensions. Financial markets reacted with modest gains in the shekel and local equities. Fiscal policy remains supportive, but external risks from regional instability and global monetary tightening persist. Forward guidance suggests cautious easing ahead, balancing growth support with inflation control.
Table of Contents
The Bank of Israel’s latest interest rate decision on November 24, 2025, lowered the policy rate from 4.50% to 4.25%, matching market expectations. This marks a pivot from the steady rate hold seen throughout most of 2025. The move reflects a response to easing inflation and a cooling economy amid persistent external headwinds.
Drivers this month
- Inflation eased to 3.80% YoY in October, down from 4.20% in September.
- Core inflation remains elevated at 3.50%, above the 2% target.
- GDP growth slowed to 1.20% YoY in Q3 2025, down from 2.10% in Q2.
- Unemployment steady at 4.10%, near historic lows.
- Geopolitical tensions in the region increased risk premiums.
Policy pulse
The 25 bps cut signals a cautious easing stance, aiming to support growth without derailing inflation control. The rate remains elevated compared to the 3.25% average in 2024, reflecting a still-tight monetary environment.
Market lens
Immediate reaction: The ILS strengthened 0.30% against the USD within the first hour post-announcement, while the TA-35 index rose 0.50%. Short-term government bond yields fell by 10 bps, reflecting eased monetary conditions.
Core macroeconomic indicators underpin the Bank of Israel’s decision. Inflation has moderated but remains sticky. Economic growth decelerated in Q3, pressured by weaker exports and subdued domestic demand. The labor market remains tight, supporting consumer spending but limiting wage-driven inflation relief.
Inflation trends
Consumer Price Index (CPI) rose 3.80% YoY in October, down from 4.20% in September and below the 4.50% peak in March 2025. Core inflation, excluding volatile food and energy, held steady at 3.50%, above the 2% target range. Shelter costs contributed 0.18 percentage points to inflation, while used car prices subtracted 0.05 points.
Growth and labor market
GDP growth slowed to 1.20% YoY in Q3, compared to 2.10% in Q2 and a 2.50% average in 2024. Export volumes declined 1.80% MoM amid global demand softness. Unemployment remained low at 4.10%, consistent with a tight labor market that supports wage growth and consumer spending.
Fiscal policy & government budget
The government maintained a moderately expansionary fiscal stance, with a 2025 deficit forecast at 3.80% of GDP, slightly above the 3.50% target. Increased infrastructure spending and social transfers aim to cushion growth amid external shocks.
Drivers this month
- Inflation easing driven by lower energy prices and moderated shelter inflation.
- Slower GDP growth due to weaker export demand and cautious consumer spending.
- Stable labor market conditions sustaining wage pressures.
Policy pulse
The rate cut positions the Bank of Israel ahead of potential further easing if inflation continues to moderate. The policy rate remains above the 3.25% average of 2024, reflecting ongoing vigilance.
Market lens
Immediate reaction: The ILS/USD exchange rate appreciated 0.30%, while 2-year government bond yields declined 10 basis points, indicating market confidence in the central bank’s calibrated approach.
This chart highlights a cautious pivot in Israel’s monetary policy, with inflation easing and growth slowing. The rate cut signals readiness to support the economy while maintaining inflation discipline. Market responses suggest confidence but vigilance remains warranted amid external risks.
Looking ahead, the Bank of Israel faces a complex environment. Inflation is trending down but remains above target. Growth is slowing amid global uncertainties and regional geopolitical risks. Monetary policy will likely remain data-dependent, balancing risks to inflation and growth.
Bullish scenario (30% probability)
- Inflation falls below 3% by mid-2026.
- Global demand recovers, boosting exports.
- Further rate cuts totaling 50 bps support growth.
Base scenario (50% probability)
- Inflation stabilizes around 3.50% through 2026.
- Moderate growth of 2% YoY sustained.
- Gradual monetary easing with 25-50 bps cuts.
Bearish scenario (20% probability)
- Inflation remains sticky above 4%.
- Geopolitical shocks disrupt trade and investment.
- Monetary tightening resumes to combat inflation.
Risks and opportunities
Downside risks include renewed inflation pressures from wage growth or supply shocks. Upside risks stem from faster global growth and easing geopolitical tensions. Fiscal policy flexibility and external developments will shape the monetary path.
The Bank of Israel’s November 2025 rate cut marks a cautious shift toward easing amid moderating inflation and slowing growth. The central bank balances a tight labor market and external uncertainties with the need to support the economy. Markets responded positively, reflecting confidence in the measured approach. Going forward, data will guide policy, with inflation trends and geopolitical developments key to the outlook.
Key Markets Likely to React to Interest Rate Decision
The interest rate decision typically impacts currency, bond, and equity markets in Israel and beyond. The Israeli shekel (ILSUSD) often strengthens on rate cuts signaling growth support. Local equities, represented by the TA-35 index, tend to rally on easing monetary conditions. Government bond yields adjust to reflect changing inflation and growth expectations. Additionally, global risk sentiment influences related assets.
- ILSUSD – Directly impacted by interest rate changes, reflecting capital flows and monetary policy expectations.
- TA35 – Israel’s benchmark equity index, sensitive to domestic monetary policy shifts.
- GLD – Gold ETF, often inversely correlated with real interest rates and geopolitical risk.
- BTCUSD – Bitcoin, influenced by risk appetite and monetary policy globally.
- EURUSD – Euro-dollar pair, reflecting broader global monetary trends impacting Israel’s trade.
FAQs
- What is the significance of Israel’s interest rate cut in November 2025?
- The cut signals a cautious easing stance amid moderating inflation and slowing growth, aiming to support the economy without risking inflation rebound.
- How does the interest rate decision affect the Israeli shekel?
- The shekel typically strengthens on rate cuts that improve growth prospects, as seen with a 0.30% appreciation post-announcement.
- What are the main risks facing Israel’s monetary policy?
- Key risks include persistent inflation pressures, geopolitical shocks, and global economic uncertainties that could force policy tightening or delay easing.
Key takeaway: Israel’s first rate cut in 2025 reflects a delicate balance between easing inflation and supporting growth amid external and domestic challenges. The central bank’s data-driven approach will remain critical in navigating the evolving macroeconomic landscape.
This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.
The interest rate cut to 4.25% compares to a steady 4.50% over the prior nine months and a 12-month average of 4.35%. This marks the first easing since February 2025, signaling a shift in monetary policy amid evolving economic conditions.
Inflation trends show a downward trajectory from a 4.50% peak in early 2025 to 3.80% in October. GDP growth deceleration aligns with the rate cut, reflecting the central bank’s balancing act between inflation control and growth support.