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

The Bank of Israel on Monday reduced its benchmark interest rate by 25 basis points to 3.50%, marking the second consecutive rate cut. The decision, which was in line with the median forecast of economists in a Bloomberg survey, brings borrowing costs to their lowest point since late 2022.

Strong Currency Prompts Easing

The central bank's move is primarily aimed at addressing the persistent strength of the Israeli shekel. Policymakers are responding to mounting pressure from exporters, particularly in the technology sector, who have raised concerns about the negative impact of a strong currency on their international competitiveness.

Finance Minister Bezalel Smotrich has also made public calls for the bank to lower rates. The decision indicates that concerns over the shekel's appreciation and moderate inflation expectations are currently outweighing projections for accelerating economic growth.

Market Impact and Context

The Israeli shekel remains near its strongest level in decades, a key factor driving the bank's monetary easing. Following the resumption of rate cuts last month, the currency weakened more than 5% against the U.S. dollar, ranking it among the worst performers in a global basket tracked by Bloomberg.

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Despite this recent depreciation, the currency's overall strength continues to be a central focus for policymakers. The latest cut is intended to further ease pressure on the shekel.

Forward Guidance

The Bank of Israel maintained its existing forward guidance, signaling a data-dependent approach to future decisions. In a statement, the bank said policy will "be determined based on inflation dynamics, economic performance, geopolitical uncertainty, and fiscal developments."

The central bank’s research department forecasts inflation will reach 1.8% by the end of the second quarter of 2027. The department's long-term projection sees the interest rate settling at 3%.