Bank of Israel likely to hold rates steady, but easing expected in upcoming meetings, possibly as early as August

ISRAEL - In Brief 07 Jul 2025 by Sani Ziv

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The Bank of Israel is expected to announce its key policy rate decision today (Monday, July 7). While we do not expect a rate cut at this meeting, there is a growing consensus that easing could begin as early as August. The sharp appreciation of the shekel (up ~9% since mid-April), a notable decline in Israel’s risk premium (CDS down to 83 bps), and a softer inflation outlook (with annual inflation expected to fall to 2.3% in August) have all strengthened the case for monetary easing. However, there are several reasons for the Monetary Committee to wait. Annual inflation remains slightly above the 3% upper bound of the target range, and the central bank continues to express concerns about supply-driven price pressures.The ceasefire with Iran, while significant, remains fragile, and broader regional tensions—including in Gaza—could quickly re-emerge.In addition, despite recent market optimism, Israel’s fiscal deficit remains high, with a deficit of 5.5% of GDP expected this year.The recent rally in markets may also reflect a temporary “post-war rebound” rather than a durable improvement in fundamentals. Given these factors, the Monetary Committee is likely to wait for further confirmation before making a move. That said, several economists view today’s meeting as a close call, noting that policy would remain restrictive even with a 25bp reduction. In our view, the Bank will keep the policy rate unchanged at 4.5% in July, but we expect a gradual easing cycle to begin in August or September. The policy rate is projected to reach 4.0% by year-end and 3.75% in 2026. A decisive reduction in geopolitical risk, softening inflation expectations, and global monetary easing trend...