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

The Bank of Israel lowered its benchmark interest rate by 25 basis points to 3.50% on Monday, its second consecutive rate cut aimed at easing pressure from a persistently strong shekel. The decision brings borrowing costs to their lowest level since late 2022 and signals policymakers' growing focus on the currency's impact on the economy.

Policy Easing Continues

The central bank's move to reduce the rate from 3.75% was widely anticipated by market participants, matching the median forecast in a Bloomberg survey. The cut reflects a continued monetary easing cycle as moderate inflation expectations give policymakers room to address other economic headwinds.

The primary driver for the rate reduction is the strength of the Israeli shekel. The currency remains near its strongest level in decades, creating significant challenges for the nation's exporters, particularly in the vital technology sector. The central bank has also faced public calls to lower rates from government officials, including Finance Minister Bezalel Smotrich.

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Market Impact and Outlook

The shekel weakened by more than 5% against the U.S. dollar last month following the resumption of the rate-cutting cycle, making it one of the worst-performing global currencies tracked by Bloomberg during that period. Despite this recent depreciation, its overall strength continues to be a central concern for the bank.

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