Bank of Israel Cuts Benchmark Rate to 3.50% Amid Strong Shekel Concerns

The Bank of Israel on Monday cut its benchmark interest rate by a quarter-percentage point to 3.50%, marking the second consecutive reduction. The move, which was widely anticipated by economists, brings borrowing costs to their lowest level since late 2022 as the central bank addresses the economic drag from a persistently strong currency.

Pressure from a Strong Currency

The primary driver for the rate cut is the continued strength of the Israeli shekel, which has remained near multi-decade highs. Policymakers face increasing pressure from exporters, particularly in the technology sector, who have voiced concerns that the currency's appreciation is eroding their competitiveness and profitability.

Finance Minister Bezalel Smotrich has also made public calls for lower interest rates to ease conditions. The central bank's decision was further supported by moderate inflation expectations, which provided it with the flexibility to focus on growth and currency concerns.

Ad

Market Context and Forward Guidance

Monday's decision aligned with the median forecast in a Bloomberg survey of economists. The shekel had previously weakened by more than 5% against the U.S. dollar last month following the prior rate cut, though it remains strong by historical standards.

The Bank of Israel maintained its data-dependent forward guidance, stating that future rate decisions "will be determined based on inflation dynamics, economic performance, geopolitical uncertainty, and fiscal developments." The central bank’s research department projects inflation will reach 1.8% by the end of the second quarter of 2027, with the policy rate forecast to be at 3% by that time.