Bank of Israel expected to hold rates tomorrow; window for Q4 easing exists

ISRAEL - In Brief 19 Aug 2025 by Sani Ziv

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The Bank of Israel is expected to announce its key policy rate decision tomorrow (Wednesday, August 20). We do not expect a rate cut at this meeting. Why wait: Headline inflation has eased but remains above the 3% upper bound. The BoI continues to warn of labor-supply-driven price pressures, including potential reserve call-ups to planned operations in Gaza. Fiscal risks are rising: The official deficit target was lifted to 5.2% of GDP, and a Gaza operation could push the deficit toward 6%-7%. Arguments for a cut (but not now): Inflation is cooling, hovering at the 3% rate. Services inflation, the BoI’s preferred gauge, fell to 3.6% in July (from around 4% in April-June). Inflation expectations have eased (forecasters at 2.2%, down from 2.4% two months ago). (See special note below) The shekel is relatively stable, and Israel’s risk premium remains contained despite the planned Gaza operation. The Fed is likely to begin cutting next month, which would expand BoI’s room to ease. What to watch next:  We do not expect a cut tomorrow. By September, we expect annual inflation to fall to the target range (2.7%-2.8%). If the Fed begins easing, the BoI could deliver one to two cuts into year-end, conditional on the advancement of the war/agreement in Gaza.Mixed signals from yesterday’s data complicate the BoI’s decision Two fresh data points released yesterday offer different insights for the interest rate decision. The first is inflation expectations: one-year market expectations derived from the capital market remain at a low of 1.6%, the lowest since May 2022. Professional forecasters project inflation of just 2.2%, right at the mid-point of the BoI’s 1–3% target range. We ...