JERUSALEM, ISRAEL – The Bank of Israel's Monetary Committee on Monday, November 24, 2025, announced a reduction of its benchmark interest rate by 25 basis points, from 4.5% to 4.25%. This decision, effective Thursday, November 28, 2025, marks the first rate cut by the central bank since January 1, 2024, signaling a significant shift in its monetary policy stance.

The move was widely anticipated by economists and comes as Israel's annual inflation rate has moderated, holding steady at 2.5% in October 2025. This figure falls comfortably within the government's target range of 1% to 3%, providing the necessary room for the policy adjustment. In its official statement, the Monetary Committee, led by Governor Amir Yaron, cited the stabilizing inflation environment and a sharp recovery in economic activity during the third quarter of 2025 as key factors behind the decision.

Economic Context and Rationale

The interest rate had remained unchanged for 14 consecutive decisions prior to this cut. The last reduction in January 2024 was aimed at supporting households and businesses battered by the economic impact of the two-year conflict with Hamas. The central bank had since maintained a cautious approach, concerned that supply constraints and expansionary fiscal policy to fund the war could fuel inflation.

However, with the ceasefire agreement of October 10, 2025, holding and geopolitical risks appearing more contained, the bank has shifted its focus towards bolstering economic growth. The Israeli economy has shown signs of a robust recovery, with GDP expanding at an annualized rate of 12.4% in the third quarter. Despite this, the overall level of economic activity remains below its long-term trend.

The Bank of Israel's research department, led by Dr. Adi Brender, noted that a decline in Israel's risk premium and the appreciation of the shekel also contributed to the decision. Since the previous rate decision, the shekel has gained 1.3% against the US dollar and 2.9% against the euro.

Reactions and Future Outlook

The rate cut was met with approval from government and industry leaders. Finance Minister Bezalel Smotrich stated the move is a clear sign that Israel is on a path to “tremendous economic growth.” Ron Tomer, president of the Manufacturers Association of Israel, praised the decision, highlighting that it would help exporters by curbing the shekel's appreciation and lower financing costs, thereby encouraging new investment.

Despite the optimism, the Bank of Israel remains cautious. The Monetary Committee's statement highlighted several risks that could reignite inflation, including geopolitical developments, fiscal policy decisions related to the upcoming 2026 budget, and a potential rise in demand alongside supply constraints. The bank's forecast suggests a slow and measured path for future cuts, with the rate expected to fall to 3.75% by the third quarter of 2026.

Relevance for Kenya

While the direct trade and investment links between Israel and Kenya are modest—Kenyan imports from Israel stood at US$50.26 million in 2024, while exports were US$5.45 million—the policy shift in Jerusalem offers important insights for Nairobi. Kenya, like Israel, has been navigating a complex economic environment characterized by inflation and the need to stimulate growth.

The Central Bank of Kenya (CBK) has pursued its own monetary easing cycle, cutting its benchmark rate for the eighth consecutive time in October 2025 to 9.25% to encourage private sector lending. Kenya's inflation stood at 4.1% in July 2025, within the CBK's target range. The Israeli experience underscores the delicate balance central banks must strike between controlling inflation and supporting economic recovery, particularly in the shadow of geopolitical uncertainty. As global economic conditions evolve, the CBK will continue to monitor such international policy shifts while tailoring its decisions to local realities, including exchange rate stability and the health of the domestic credit market.