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

The Bank of Israel on Monday lowered its benchmark interest rate by 25 basis points to 3.50%, its second consecutive rate cut. The move, which was in line with the median forecast in a Bloomberg survey, brings borrowing costs to their lowest level since late 2022 as policymakers seek to counter the effects of a strong currency.

Shekel Strength Drives Easing

The central bank's decision comes amid mounting pressure from exporters, particularly in the technology sector, who are struggling with the persistently strong shekel. The currency's appreciation makes Israeli goods and services more expensive abroad, eroding competitiveness and profitability.

The move also follows public calls from Finance Minister Bezalel Smotrich for the central bank to reduce rates. Policymakers weighed the impact of the strong shekel and moderate inflation expectations against projections for accelerating economic growth.

Market Impact and Forward Outlook

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The Israeli shekel has already reacted to the central bank's easing stance, weakening by more than 5% against the U.S. dollar last month following the previous rate reduction. Despite this recent decline, the currency remains near its strongest levels in decades, according to the source material.

In its accompanying statement, the Bank of Israel maintained its forward guidance, indicating that future rate decisions will depend on incoming data. The bank will monitor "inflation dynamics, economic performance, geopolitical uncertainty, and fiscal developments."

The central bank’s research department projects that 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.