The Bank of Israel raised the interest rate from 2.75 to 3.25 percent, equalling a record high that was set in September 2011, according to the bank's figures.
The base interest rate registered a sharp increase compared to the figure in April, which stood at 0.1 percent.
The bank noted that inflation in Israel has been at 5.1 percent over the past 12 months, above the upper 3-percent bound of the government target range.
Israel is recording strong economic activities, with a tight labor market and an increase in the inflation environment, therefore it was decided to continue the process of increasing the interest rate, the bank explained.
However, monetary policy tightening and moderation of economic activity abroad are expected to lead to economic slowdown in Israel, it noted.
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