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

The Bank of Israel on Monday cut its benchmark interest rate by 25 basis points to 3.50%, the second consecutive reduction aimed at curbing the strength of the shekel. The move, which brings borrowing costs to their lowest level since late 2022, was widely anticipated and matched the median forecast in a Bloomberg survey.

Currency Concerns Drive Policy

The central bank's decision was primarily driven by the persistent strength of the Israeli shekel, which has remained near multi-decade highs. Policymakers face mounting pressure to address the currency's appreciation, which negatively impacts the competitiveness of the nation's exporters and technology companies.

The rate cut follows public calls for monetary easing from officials including Finance Minister Bezalel Smotrich. The central bank is acting as moderate inflation expectations and a strong currency outweigh projections for accelerating economic growth.

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Market Impact and Forward Outlook

Following the previous rate cut, the shekel weakened by more than 5% against the U.S. dollar last month, ranking it among the worst-performing global currencies tracked by Bloomberg for that period. Despite this recent dip, the currency remains historically strong.

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 bank's own research department projects inflation will reach 1.8% by the end of the second quarter of 2027, with interest rates falling to 3% by that time.