Bank of Israel Cuts Key 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%, marking its second consecutive rate cut. The move, which was widely anticipated by economists, brings borrowing costs to their lowest level since late 2022 as policymakers seek to counter the persistent strength of the national currency.

Pressure from Strong Currency

The central bank's decision comes amid growing concerns over the impact of a strong shekel on the nation's economy. According to the source material, Israeli technology companies and other exporters have increasingly voiced alarm about the currency's appreciation, which can make their goods and services less competitive on the global market.

The monetary policy committee also faced public calls for looser policy, including from Finance Minister Bezalel Smotrich. The bank's actions suggest that managing the currency's strength and supporting the export sector currently outweigh concerns about accelerating economic growth, especially with inflation expectations remaining moderate.

Ad

Market Impact and Outlook

The shekel has already responded to the central bank's recent easing cycle. Following the previous rate cut, the currency weakened more than 5% against the U.S. dollar last month, ranking it among the worst performers in a broad basket of global currencies tracked by Bloomberg. Despite this recent depreciation, the shekel remains near multi-decade highs.

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