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 central bank stated its policy focuses on price stability, supporting economic activity, and market stability, with future rate decisions dependent on inflation, economic performance, geopolitical uncertainty, and fiscal developments.

Analysts were divided prior to the announcement. Supporters of the cut cited inflation falling below the target, a strong shekel mitigating import price increases, and early signs of labor market easing. Those favoring holding the rate steady pointed to the economy's rapid growth and the possibility of pausing after two consecutive reductions to await more data.

Key justifications for the rate cut included moderating inflation below the target range in recent months, a significant 6.2% GDP growth in the second quarter compared to the last quarter of 2025 (partially recovering from the "Operation Iron Sword" impact), and a 3.8% growth when excluding foreign production by Israeli companies. Despite high geopolitical uncertainty, Israel's risk premium remained stable, similar to pre-October 7 levels, with no significant shekel depreciation.

The reduction will 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 cumulative monthly savings for such a mortgage have reached around 334 shekels. New borrowers will benefit from lower initial rates, while savers in fixed-income instruments may see reduced returns.

Business sector leaders offered mixed reactions. The President of the Manufacturers Association urged faster rate reductions, arguing the strong shekel harms exports. The Chairman of the Business Sector Presidency welcomed the move as a responsible step showing confidence in the Israeli economy. However, the President of LAHAV, the Organization of Independent Businesses and Self-Employed, called the 0.25% cut insufficient, advocating for policies that actively encourage growth rather than a wait-and-see approach.