Bank of Israel Cuts Interest Rate for Third Consecutive Time

The Bank of Israel announced on Tuesday its decision to lower the benchmark interest rate by a quarter of a percentage point, marking the third consecutive reduction. The new base interest rate will be 3.25%, with the prime lending rate set at 4.75%. This brings the total reduction in interest rates since the beginning of the year to 1.00%.

The central bank cited several factors influencing its decision, including continued moderation in inflation, which stood at 1.5% in July, below the target range of 1%-3%. The bank also noted strong GDP growth exceeding 15%, a tight labor market, and the shekel's stability. However, the Bank of Israel acknowledged ongoing geopolitical uncertainties, exemplified by a more than 25% surge in Brent crude oil prices during the reviewed period.

Finance Minister Bezalel Smotrich welcomed the rate cut, calling it a "necessary step" and praising the governor. He suggested, however, that the reduction should have been more significant, arguing that further decreases are needed to ease the burden of loan payments for citizens and businesses, stimulate investment, and reduce the cost of living.

The next interest rate decision is scheduled for October 21, just six days before national elections. In market reactions, the shekel strengthened against the dollar, trading above 3.02, while the construction index surged over 6%. The banking index declined, with other market indices showing moderate responses.

This rate cut occurs against the backdrop of signals from U.S. Federal Reserve Chair Jerome Powell at the Jackson Hole symposium, suggesting a potential interest rate hike in the U.S. in mid-September.