Bank of Israel Likely to Cut Interest Rates
The Bank of Israel is anticipated to reduce its base interest rate on Monday, having kept it steady for about two years. This expectation seems to be shared among economists from various large banks and investment firms, and there are a few reasons behind this consensus.
First, the inflation rate is already falling within the government’s target range. It has moved from a rate of 1% to 3% and currently stands at 2.5%. Looking ahead, forecasts for the last two months of 2025 suggest a potential decline into negative numbers. Meanwhile, there are ongoing efforts to finalize next year’s national budget, which the government hopes to approve by March, despite some delays.
Interestingly, the US Federal Reserve recently lowered its interest rates, with further cuts expected soon. If the Bank of Israel chooses not to follow suit, the gap between interest rates in the US and Israel will likely increase. Additionally, there’s a call for post-war economic stimulation, and lower rates could help spur growth, at least in the short term.
However, there are also reasons against this rate decrease. Political uncertainty looms large; if the ultra-Orthodox conscription bill gets rejected and the budget isn’t passed by March, there’s the possibility of parliament being dissolved and an interim government taking over until next fall. These concerns might make keeping the interest rate at 4.5% a more appealing option.
On another front, the Tel Aviv Stock Exchange is expected to react on Sunday to the movements in the US markets over the weekend, along with rising speculation concerning the possible rate cut. Once foreign exchange trading begins on Monday, the shekel might continue to weaken against the dollar and euro, similar to last week’s trends in anticipation of these changes.
Interest rates are also central to another pressing narrative: record profits for banks. Just when it seemed their earnings might have peaked, the next quarter delivered even higher results.
In the third quarter of 2025, the five largest banks reported an astonishing profit of 8.7 billion naira (around $2.61 billion). This translates to an annual profit of 35 billion naira (approximately $10.5 billion), a significant increase compared to 30 billion naira ($9 billion) for all of 2024.
At face value, soaring profits for banks may not seem alarming; after all, an increase in revenue is often regarded as a positive sign in many industries. Yet, that’s where the issue lies; these profits are coming at a direct cost to consumers.
As banks rake in record profits, borrowers face higher interest rates on loans, while savers see dwindling returns on deposits.
The Bank of Israel has kept its base interest rate at 4.5% for around two years, with a prime rate of 6.0%. Despite this, commercial banks have quietly been reducing the interest paid to account holders nearly every month.
Currently, many banks offer minimal or no interest on checking accounts—sometimes as low as 0.1%, while certain conditions may allow for rates of up to 1.5%. At the same time, deposit rates have been cut considerably, even with the central bank maintaining its rates since January 1, 2024.
This unilateral decision-making, which has inflated bank profits at the expense of consumers, has drawn significant criticism not only from the public but also from the Diet and the Ministry of Finance. Even the Bank of Israel, which typically prioritizes financial stability and refrains from interfering in banking policy, has expressed rare dissatisfaction, urging banks to provide better support for citizens, particularly reservists and small to medium-sized businesses affected by the war.
“Even if the central bank lowers interest rates, banks must be compelled to offer fairer interest rate spreads. Should bank executives ignore the growing impatience of lawmakers, they may soon find themselves facing stricter regulations, possibly even legislation aimed at closing that gap.”
In response, banks have initiated some goodwill programs at the request of Governor Amir Yaron and the Department of Banking Supervision, though the overall effects have been minimal. Bank profits remain on the rise, increasing by another 10-20% compared to the previous year.
The proposed tax plan still needs legislative backing, having been crafted by an interagency committee. It’s less aggressive compared to the windfall taxes introduced for 2024 and 2025, but is expected to generate at least 750 million naira ($225 million) per year. The idea is to apply a 9% tax on 50% of the profits above the average for each large bank from 2018 to 2022, a time before the recent significant rate hikes.
This initiative seems promising and may even enhance competition in the banking sector, as smaller banks would be less burdened by certain regulations. Still, it’s debatable whether this measure will notably reduce the substantial profits that major banks continue to accumulate from consumers.
The core issue remains: bridging the gap between the high-interest rates that banks charge borrowers and the low rates they offer to depositors. Even with a potential 0.25% rate cut from the central bank on Monday, banks will need to adjust their practices to maintain fair interest spreads. If they fail to do so, they might encounter a more rigorous regulatory environment as lawmakers seek to rectify the situation.
