Bank of Israel Lowers Benchmark 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 its second consecutive rate cut. The decision, which brings borrowing costs to their lowest point since late 2022, was widely anticipated and matched the median forecast in a Bloomberg survey of economists.

Pressure from Strong Shekel

The central bank's move is primarily aimed at addressing the persistent strength of the Israeli shekel, which remains near multi-decade highs. Policymakers face mounting pressure to ease monetary policy as the strong currency negatively impacts the country's exporters, particularly those in the technology sector.

Concerns from the business community have been echoed by government officials, with Finance Minister Bezalel Smotrich making multiple public calls for the Bank of Israel to reduce rates. The central bank is balancing the currency's strength and moderate inflation expectations against projections for accelerating economic growth.

Market Reaction and Forward Outlook

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The shekel has already reacted to the central bank's easing stance, weakening more than 5% against the U.S. dollar last month following the previous rate cut. This made it one of the worst-performing global currencies tracked by Bloomberg during that period.

In its statement, the Bank of Israel maintained its forward guidance, indicating that future policy will remain data-dependent. The bank stated that subsequent decisions "will be determined based on inflation dynamics, economic performance, geopolitical uncertainty, and fiscal developments."

The central bank’s research department projects inflation will reach 1.8% by the end of the second quarter of 2027, with interest rates forecast to be at 3% by that time.