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 decision, driven by a low annual inflation rate of 1.5% and robust economic growth in the second quarter, allows for monetary easing despite geopolitical uncertainties and global market volatility. The prime lending rate, which influences most loans and mortgages, will decrease to 4.75% starting tomorrow.

For homeowners with mortgages linked to the prime rate, the immediate impact will be a modest reduction in monthly payments. For a NIS 1 million mortgage over 25 years, the monthly payment will decrease by approximately NIS 51, resulting in a total saving of around NIS 15,000 over the loan's term, assuming the rate remains stable. Those with mixed mortgage structures, including a larger portion linked to the prime rate, will see higher savings, while those with conservative, fixed-rate structures will experience minimal changes.

On the deposit side, the transmission of the rate cut is less direct. Banks are expected to lower interest rates on shekel deposits by about 0.15%, bringing the average rate down to approximately 2.8%. For a NIS 200,000 deposit held for a year, this translates to a net difference of about NIS 255. While the real return remains positive given the low inflation, the buffer is shrinking.

For loans tied to the prime rate, adjustments will be automatic, leading to small monthly savings. Fixed-rate loans will see minimal changes, and the impact on non-bank credit will be negligible. The central bank's forecast suggests an average interest rate of around 3% by the second quarter of 2027, implying at least one more rate cut in the coming year.

The rate cut is generally viewed positively for the bond market, particularly long-term government bonds, while potentially reducing returns on short-term instruments. Real estate and development stocks are expected to benefit from lower financing costs and improved buyer affordability. Banks face a mixed outlook, with narrowing interest margins but potentially lower credit loss provisions and increased demand for credit.