Bank of Israel Lowers Key Interest Rate to 3.50% Amid Shekel Strength

The Bank of Israel on Monday lowered its benchmark interest rate by 25 basis points to 3.50%, its second consecutive rate cut aimed at curbing the strength of the shekel. The move brings borrowing costs to their lowest point since late 2022 and comes amid mounting pressure from exporters concerned about the currency's impact on their competitiveness.

Second Consecutive Cut

The central bank's decision to reduce the rate from 3.75% was in line with the median forecast of economists in a Bloomberg survey. According to the bank, the policy move was driven by a strong shekel and moderate inflation expectations, which outweighed projections for accelerating economic growth.

The persistent strength of the Israeli currency has been a primary concern for policymakers. A stronger shekel makes Israeli exports more expensive on the global market, potentially harming key sectors like technology. The pressure to act has been public, with Finance Minister Bezalel Smotrich and various exporters calling for lower interest rates.

Ad

Market Impact and Outlook

The shekel has already responded to the central bank's recent easing cycle, weakening more than 5% against the U.S. dollar last month after the previous rate reduction. Despite this depreciation, the currency remains near its strongest levels in decades, suggesting that policymakers may see a need for further action.

Looking ahead, the Bank of Israel maintained its existing forward guidance. In its statement, the bank noted 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 Q2 2027, with interest rates falling to 3% by that time.