Bank of Israel Cuts Interest Rate Again, Easing Mortgage Payments

The Bank of Israel announced a quarter-percentage-point interest rate cut on Tuesday, lowering the benchmark rate to 3.25%. This marks the third consecutive reduction and the fifth since November 2025. The new rate will take effect on Thursday and is expected to significantly reduce monthly mortgage payments for borrowers.

Businesses with substantial loans will also see their repayment amounts decrease by thousands of shekels. The rate cut is anticipated to impact various sectors of the economy. It is also likely to lead to a strengthening of the U.S. dollar against the Israeli shekel, with the dollar already rising to 3.02 shekels from 3.01 following the announcement.

This dollar appreciation could slightly increase the cost of imported goods and raw materials, potentially leading to a minor rise in inflation in the coming months. However, historical trends suggest that previous dollar strengthening after rate cuts was temporary, with the shekel often regaining strength. The rate decrease may also reduce the attractiveness of shekel-denominated deposits, potentially driving some capital towards the stock market and leading to long-term stock price increases.

Conversely, the lower interest rates are expected to negatively affect bank profits to some extent. The cumulative effect of rate reductions since November 2025, when the prime rate was 6% and is now 4.75%, has already provided substantial relief. For instance, a borrower with a 450,000 shekel mortgage over 30 years could save approximately 126,000 shekels. The savings are more significant for larger loans and longer repayment periods.

The Association of Mortgage Consultants noted that while the current cut adds to a 1.5% decrease from the peak, the return to lower rates is gradual. They advise borrowers to re-evaluate their mortgage structures and monthly payments in this environment. The association has observed a shift in borrower behavior, with an increasing preference for index-linked mortgage tracks, which have risen from 10% to over 20% of new loans. They caution, however, that loan decisions should consider the risks and costs associated with each track, not solely future interest rate expectations.