Bank of Israel Cuts Interest Rate for Third Time, Easing Loan Costs

The Bank of Israel's Monetary Committee announced a third consecutive interest rate cut, lowering the benchmark rate to 3.25%. This decision also reduces the prime lending rate, from which most loans and mortgages are derived, to 4.75%. The bank stated its policy focuses on price stability, supporting economic activity, and market stability, with future rate decisions dependent on inflation, economic activity, geopolitical uncertainty, and fiscal developments.

Analysts were divided prior to the announcement. Supporters of the cut pointed to inflation falling below the target, a strong shekel mitigating import price increases, and early signs of a cooling labor market. Those favoring holding rates steady argued the economy is rebounding strongly and that after two consecutive cuts, the bank could afford to pause and await more data.

Key justifications for the rate reduction included moderating inflation below the target range in recent months, a 6.2% GDP growth in the second quarter compared to the last quarter of 2025, and a continued strong shekel and stable risk premium despite geopolitical tensions. However, the labor market remains tight, with business sector wages (excluding high-tech) rising 5.4% year-on-year from March to May. Housing market inventory is stable and high, with a moderate increase in transactions in May and June.

The rate cut will immediately lower monthly payments for variable-rate mortgages and loans. For a typical 450,000 shekel mortgage over 25 years, the monthly payment will decrease by approximately 65 shekels, saving about 20,000 shekels over the loan's life. Since November 2025, the monthly payment on such a mortgage has fallen by roughly 334 shekels. New borrowers will benefit from lower initial rates, while savers in fixed-income deposits will see reduced yields.

Business leaders offered mixed reactions. The President of the Manufacturers Association urged faster rate cuts, citing inflation within the target and the strong shekel hurting exports. The Chairman of the Business Sector Presidency praised the decision as responsible and a sign of confidence in the Israeli economy. However, the President of LAHAV, the Organization of Independent Business Owners, called the quarter-point cut insufficient and a mistake, advocating for policies that encourage growth over waiting.