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Bank of Israel Cuts Interest Rate to 3.50% to Counter Strong Shekel
The Bank of Israel on Monday lowered its benchmark interest rate by 25 basis points to 3.50%, its second consecutive cut, as policymakers moved to address the persistent strength of the shekel amid moderate inflation. The decision, which was in line with the median forecast in a Bloomberg survey, brings borrowing costs to their lowest point since late 2022.
Rationale Behind the Cut
The central bank's decision signals that concerns over the currency's appreciation and its impact on the economy are outweighing projections for accelerating economic growth. The move follows mounting pressure from both the private and public sectors.
Israeli technology companies and other exporters have increasingly voiced concerns about the negative effects of a strong shekel on their operations and international competitiveness. In addition, Finance Minister Bezalel Smotrich has made multiple public calls for the Bank of Israel to reduce rates.
AdMarket Context and Forward Outlook
The shekel, which remains near its strongest level in decades, weakened by more than 5% against the U.S. dollar last month following the central bank's prior resumption of rate cuts, according to Bloomberg data. The latest move is expected to exert further downward pressure on the currency.
In its accompanying statement, the Bank of Israel maintained its forward guidance, noting that future decisions "will be determined based on inflation dynamics, economic performance, geopolitical uncertainty, and fiscal developments." The bank's own research department projects inflation will reach 1.8% by the end of the second quarter of 2027, with interest rates forecast to be at 3% by then.