Full Breakdown
Bank of Israel's Potential Interest Rate Cut Amidst Record Bank Profits
11/24/2025, 1:02:05 AM
Anticipated Interest Rate Changes
The Bank of Israel is expected to announce a cut in its benchmark interest rate from 4.5% on Monday, a move anticipated by economists from major banks and investment houses. This expectation arises from several factors, including inflation currently at 2.5%, which is within the government's target range of 1% to 3%. Additionally, forecasts indicate potential negative inflation rates in late 2025. The U.S. Federal Reserve's recent interest rate cuts have also created pressure for Israel to follow suit to avoid widening the interest rate gap. Furthermore, the Israeli economy requires stimulation following the recent war, making a rate cut a viable option for short-term growth.
Record Bank Profits and Consumer Impact
Despite the Bank of Israel maintaining its interest rate, the five largest banks—Bank Hapoalim, Bank Leumi, Discount Bank, Mizrahi Tefahot, and First International Bank—have reported record profits, totaling NIS 8.7 billion ($2.61 billion) for the third quarter of 2025. This profit surge, a 17% increase from the same quarter in 2024, has raised concerns as borrowers face higher interest rates on loans while savers receive minimal returns on deposits. The banks have been criticized for reducing interest paid to account holders, with rates as low as 0.1% on checking accounts. This disparity has prompted calls from the Knesset and the Finance Ministry for banks to implement fairer interest spreads.
Government Response and Proposed Taxation
In response to the banks' soaring profits, the Finance Ministry has proposed a new tax on the five largest banks, expected to generate at least NIS 750 million ($225 million) annually. This tax, set at 9% on 50% of profit increases compared to average earnings from 2018 to 2022, aims to address the widening fiscal gap and is less aggressive than previous windfall taxes. While the proposal is still subject to legislative approval, it reflects the government's frustration with the banks' profit margins at the expense of consumers.
Criticism and Future Outlook
Critics argue that the proposed tax may not significantly reduce the banks' substantial profits, which continue to grow despite public outcry. The Supervisor of Banks, Daniel Hahiashvili, has allowed banks to distribute up to 75% of their profits, leading to a significant increase in dividends. However, experts warn of potential declines in asset quality and returns on equity due to moderating inflation and the anticipated interest rate cut. Bank Hapoalim has already raised its provisions for credit losses, indicating a cautious approach to future economic challenges.
Verbatim Quotes
- “The banks’ profits continued to soar, rising another 10% to 20% compared to last year.” — Source
- “The proposed formula, still subject to legislative approval, was crafted by an inter-ministerial committee.” — Source
- “A significant reduction in transfer payments by the state to reserve soldiers, evacuated families, and businesses, is liable to intensify the erosion of the financial strength of borrowers. I don’t foresee dramas, but I certainly expect a certain decline in the banks’ returns on equity, even before taking into account the possibility of higher taxation of the banks.” — Moty Citrin, VP at Moody’s Israel
Conclusion
As the Bank of Israel prepares for a potential interest rate cut, the financial landscape remains complex, characterized by record bank profits and increasing scrutiny from the government. The interplay between interest rates, consumer impact, and regulatory responses will be critical in shaping the future of Israel's banking sector.
