The rate decision – July 7, 2025: no cut, hawkish tone, but 50bp expected no later than Q4 2025

ISRAEL - In Brief 07 Jul 2025 by Sani Ziv
The central bank of Israel kept its benchmark interest rate unchanged at 4.5% on July 7th, for the twelfth consecutive meeting. The decision was largely in line with expectations, even though a growing number of economists and market participants had anticipated a signal toward monetary easing.Despite the end of the war with Iran and the positive market response, the Monetary Committee adopted a cautiously hawkish tone on inflation and geopolitical risks. Governor Amir Yaron noted that headline inflation (3.1%) remains above the 1-3% target range and that while forecasts suggest inflation will soon return to mid-range, uncertainty remains elevated. Yaron emphasized two opposing forces currently influencing inflation: On the one hand, the shekel’s appreciation continues to exert downward pressure on prices. On the other hand, the sharp drop in Israel’s risk premium—following the Iran operation and rising hopes for a ceasefire in Gaza—could accelerate domestic demand faster than the easing of supply constraints in the labor market. This is a somewhat convoluted argument, especially considering that, since October 2023, the Bank of Israel repeatedly justified high interest rates as necessary due to elevated risk premia. The Governor and the Committee both reiterated that monetary policy remains more data-dependent and less forward-looking in the current environment, with no intention of front-running the curve. However, they made it clear that if incoming data confirm disinflation, rate cuts will follow. Our view: As we noted on Monday, we expect the Bank of Israel to begin easing in August or September. Annual inflation is projected to fall below 2.5% in August (with the...

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