Bank of Israel rate decision: hawkish tone, but Trump plan could pave way for easing

ISRAEL - In Brief 30 Sep 2025 by Sani Ziv

---

The Bank of Israel kept its policy rate unchanged at 4.5%, in line with market expectations. In our view, the tone was slightly hawkish relative to expectations, emphasizing geopolitical uncertainty, sticky inflation, and the need to maintain financial stability. The wording was chosen to highlight risks rather than opportunities. For example, while inflation has returned to the 1-3% target range at 2.9%, the bank chose to stress that it is likely to remain near the upper bound and could even exceed it in the coming months before moderating in 2026. The press briefing by Governor Yaron reinforced this message. He highlighted the resilience of the Israeli economy, but stressed labor-market tightness, wage acceleration, and supply-side bottlenecks, saying that prolonged mobilization continues to threaten the disinflation process. Importantly, the Governor chose unusually direct language about the need for “responsible fiscal policy” to insure debt dynamics. This can be read as a message to the government that fiscal slippage will complicate the monetary path and risk pushing yields higher. Looking ahead, a potential breakthrough in the Israeli-Palestinian agreement under Trump’s plan could accelerate monetary easing by reducing risk premia, lowering geopolitical uncertainty, and easing fiscal pressures. In this scenario, the shekel would likely appreciate and inflation expectations would moderate further, providing the central bank with room to reduce rates. At the same time, the hawkish tone of yesterday’s decision leads us to revise our policy rate forecast. Whereas we had previously expected the first cut by late 2025, we now see the easing cycle pushed back to early ...