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

The Bank of Israel lowered its benchmark interest rate by 25 basis points to 3.50% on Monday, citing concerns over the strength of the shekel and its impact on the nation's exporters. This marks the second consecutive rate reduction and brings borrowing costs to their lowest level since late 2022.

Rate Cut Details

The move from the previous rate of 3.75% was widely anticipated by market participants, aligning with the median forecast in a Bloomberg survey of economists. The central bank's decision comes as moderate inflation expectations provide policymakers with the flexibility to address other economic pressures.

The primary driver for the cut is mounting pressure from Israeli technology companies and other exporters, who have voiced increasing concern about the persistently strong shekel eroding their international competitiveness. Finance Minister Bezalel Smotrich has also made multiple public calls for the central bank to lower interest rates.

Currency and Market Context

Despite the shekel weakening by more than 5% against the U.S. dollar last month following the prior rate cut, the currency remains near its strongest levels in decades. This underlying strength has kept the issue at the forefront for both the government and the business community.

Ad

The Bank of Israel maintained its forward guidance, stating in its official release that future rate decisions will be determined by a range of factors, including:

• Inflation dynamics
• Economic performance
• Geopolitical uncertainty
• Fiscal developments

Central Bank Outlook

The central bank’s own research department projects a gradual easing path. It forecasts inflation will reach 1.8% by the end of the second quarter of 2027, at which point it expects the policy rate to be at 3.0%.