Bank of Israel Cuts Interest Rate, Easing Mortgage Payments and Deposit Returns

The Bank of Israel has reduced its benchmark interest rate by 0.25% to 3.25%, marking the third consecutive cut and the fourth since the start of 2026. This move lowers the prime lending rate, which influences most loans and mortgages, to 4.75%, effective immediately. The decision was driven by a low annual inflation rate of 1.5%, well below the target range, and robust economic growth in the second quarter, although the latter was influenced by post-war recovery. Despite global interest rate hikes and rising bond yields, the central bank aims to strengthen the shekel.

The immediate impact is felt on mortgages linked to the prime rate. For a NIS 1 million mortgage over 25 years, the monthly payment will decrease by approximately NIS 51, resulting in a cumulative saving of about NIS 15,000, assuming the rate remains stable. Mortgages with fixed or variable rates tied to longer terms will see less immediate or no change. Those with a higher proportion of their mortgage linked to the prime rate will experience greater savings.

On the deposit side, the transmission of the rate cut is partial, with banks expected to lower deposit rates by only about 0.15%. For a NIS 200,000 deposit, this translates to a net difference of roughly NIS 255 annually. While the real return remains positive given the low inflation, the buffer is shrinking. Deposit rates are often negotiable, and the difference between advertised and actual rates can be significant.

For loans tied to the prime rate, monthly payments will decrease slightly. For example, a NIS 100,000 loan over five years will see a reduction of about NIS 12 per month. The impact on fixed-rate loans and non-bank credit is minimal. The cumulative effect of this and previous rate cuts is becoming noticeable.

Looking ahead, the rate cut is generally positive for long-term government bonds and may encourage investment in riskier assets like stocks, particularly in the real estate and entrepreneurship sectors, due to lower financing costs. The next interest rate decision is scheduled shortly before the upcoming Knesset elections. Bank of Israel forecasts suggest a potential further rate cut in the coming year, bringing the average rate closer to 3%.