Citi: No rate cut next week but two more by Q1 2027

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The Bank of Israel is set to make its next interest rate decision next week, unusually on a Tuesday instead of a Monday. The markets are eagerly awaiting the decision of the Bank of Israel’s Monetary Committee headed by Governor Prof. Amir Yaron, and wondering whether we will see a third consecutive interest rate cut.

While in recent days contracts have priced in a 50% chance of another cut, expectations have moderated to the 40% range following the strengthening of the dollar, which crossed above the NIS 3/$ threshold. The local trend in the foreign exchange market is in contrast to the weakening of the US currency worldwide, due to developments in the bond market and the jump in 30-year bond yields to a two-decade high.

Global investment and financial giant Citi sees the Bank of Israel leaving the rate unchanged next week, even though the annual inflation rate in July fell to a five-year low - 1.5%.

Citi writes, "Next week’s interest rate decision is once again one that could go either way. In the absence of any urgency, we think a decision to leave rates unchanged is marginally more likely than one to loosen policy further at this point in time. However, we still expect two more rate cuts over the cycle."

With Israel’s rate currently at 3.5%, two more cuts would bring it down to 3%.

Citi added, "There are reasonable arguments to support either decision and arguably neither would be an obvious policy error. The case for a cut is that rates are still in restrictive territory and with inflation below the mid-point of the target range (1%-3%), the journey towards neutral might as well continue.

"Factors that could pose upside risk to inflation: chiefly the tight labor market, fiscal expenditure and global energy prices were already present in May and by themselves, don’t have to prevent policy loosening. Furthermore, the shekel remains strong and despite depreciation compared to its lows, FX pass through in cumulative terms is likely still marginally disinflationary."

So why despite all this does Citi still believe that the Bank of Israel will prefer to wait on its cut? In six words, "In the absence of any urgency." Citi expands further on this, "Unlike in May exchange rate movements are not one-sided and risks to the inflation outlook have become more balanced again; readings from September on should be closer to the mid-point of the target range again. Having cut twice in a row, we think the BOI might prefer to reassess later in the year. The effect from disappointing the half of the market that is pricing a rate cut can be mitigated with appropriate communication, implying that the cycle of cuts has not ended but merely slowed."

Citi’s base scenario is another 25 basis point cut this year, and another cut in the first quarter of 2027 to a level of 3%.

Yaron: Interest rate forecast isn't a promise

Israel's inflation rate falls to 1.5%

The Israeli market is also divided

Israeli economists are also split on what the Bank of Israel will do next week. Ofer Klein, head of the economics and research department at Harel Insurance and Finance, estimates, like Citi, that the Governor will leave the interest rate unchanged. Klein notes, "After two consecutive cuts and in a local environment of a tight labor market and a global environment in which there is a tendency in the opposite direction, there is a high chance in our opinion that the interest rate will remain unchanged this time." Klein also points to the geopolitical and budgetary risks as a source of caution.

On the other hand, Meitav presents a firm position supporting an immediate interest rate cut and believes the Bank of Israel will make another cut. The investment house stresses the moderate inflationary environment and the strengthening of the shekel, and writes, "All considerations actually support lowering the interest rate... Inflation in Israel has fallen to 1.5% - below the midpoint of the target and the lowest since 2021."

Published by Globes, Israel business news - en.globes.co.il - on August 25, 2026.