Rate decision preview: Bank of Israel to hold rates; updated macro forecast in focus

ISRAEL - In Brief 28 Sep 2025 by Sani Ziv

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Most forecasters (including us) expect no change in the policy rate on Monday. Why do we believe the Bank of Israel will keep rates unchanged? August’s CPI, published on September 16, surprised to the upside with a 0.7% monthly increase. While annual inflation declined to 2.9%, back within the Bank’s 1-3% target range for the first time since September 2024, it remains close to the upper bound. Inflationary pressures, particularly in services and housing, remain elevated. From a labor market perspective, we also see little reason to cut rates. Israel’s official unemployment rate fell to 2.9% in August, from 3.1% in July (seasonally adjusted). The broad unemployment rate, which also counts those temporarily absent from work due to the war, eased to 4.2% from 4.4%. The labor force participation rate fell by a full percentage point since December 2024, to 62.3% in August 2025, reflecting both negative net migration and declining participation. The number of reservists remained elevated at 29 thousand workers, slightly lower than July but still well above the pre-Iran war average of around 20-21 thousand. Moreover, wage data show renewed acceleration in annual wage growth in July 2025, to 4.5%, after moderating to 3% between January and June. Another important reason to keep rates unchanged is geopolitical uncertainty: The ongoing operation in Gaza, and the government’s insistence on pursuing a prolonged military presence there, continue to pose downside risks to growth and upward risks to inflation. Why cut rates? Several factors argue for lowering rates at this stage. The most important factor is the global environment. The Federal Reserve lowered rates in September and ...