On Monday (February 23) the Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, is due to make an interest rate decision. After two consecutive rate cuts in its previous two meetings, with the most recent cut surprising the market, what is expected this time?
Publication of the Consumer Price Index (CPI) at the start of the week provided optimism for a third consecutive cut. The CPI was lower than expected and the annual rate of inflation fell to 1.8%, its lowest rate for 4.5 years, supporting forecasts that inflation in 2026 will be below 2% - beneath the midpoint of the Bank of Israel’s 1%-3% annual target range. As a result, until two days ago, analysts gave an 80% chance of a rate cut on Monday. But now the picture has changed.
One of the main factors behind the moderation in inflation, and also supporting the interest rate cut, is the strengthening of the shekel. Earlier this month, it broke a 30-year record against the dollar, when the US currency fell below NIS 3.07/$. Reducing interest rates is considered an indirect tool for the Bank of Israel in slowing the sharp appreciation of the Israeli currency, which is hurting exporters.
In the last two days, however, the direction of forex trading has changed. The shekel has lost ground against the dollar and other major currencies. The dollar has gradually climbed to a level of NIS 3.14/$. The main reason: the possibility that the US will launch a military campaign against Iran, which will directly affect global markets and Israel in particular. As of today, the probability of an interest rate cut is only about 40%.
What do the experts think?
A market source estimates that all the conditions support leaving the interest rate unchanged this time due to the geopolitical situation. "The shekel has weakened, it makes no sense to cut the interest rate when there are winds of war in the background. It does not fit the conservatism of the Bank of Israel to lower the interest rate for the third time in a row when there is such a geopolitical and economic risk on the horizon. This conservatism served the Israeli economy well during the two and a half years of the war. The bank has built excellent credibility during this period, and it is not logical or advisable to play with it right now, in my opinion," he says.
Modi Shafrir, chief financial markets strategist at Bank Hapoalim, also agrees that the weakening of the shekel and the tensions do not support the possibility of a cut. "The market is now pricing in a 40% probability of an interest rate cut next week, while only last Monday, the market priced in a probability of about 80%. Let us recall that at the time of the interest rate decision in January, the dollar-shekel exchange rate was about NIS 3.17/$ and the euro-shekel exchange rate was about NIS 3.70/€." In other words, the sharp appreciation recorded in the last month and a half since the previous interest rate decision has almost been erased. As of today, the euro-shekel exchange rate stands at NIS 3.68/€.
In contrast, First International Bank trading room manager Idit Moskovich says, "A weak dollar over time supports maintaining the inflation target within the desired range. Today's increase is not expected to be a decisive factor in the overall considerations for lowering the interest rate in the upcoming decision. The declining inflation figure and the decline in the Bank of Israel's target range support a lowering of the interest rate next week."
Harel Insurance and Finance estimated after the CPI was published at the beginning of the week that this time the Bank of Israel would prefer to wait with the reduction. Now, due to the latest developments, this assessment has even strengthened.
Published by Globes, Israel business news - en.globes.co.il - on February 20, 2026.
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