Bank of Israel Cuts Key Interest Rate, Easing Mortgage Payments

The Bank of Israel announced on Tuesday, September 1, a 0.25% reduction in its benchmark interest rate, bringing it down to 3.25%. This change, effective Thursday, September 3, will also lower the prime lending rate from 5% to 4.75%. This move is expected to decrease monthly mortgage payments, particularly for loans tied to the prime rate.

This marks the third consecutive rate cut and the fifth since November 2025. The decision will also reduce borrowing costs for companies, potentially saving them thousands of shekels on loans totaling millions. For individuals, a mortgage of 500,000 shekels over 25 years could see savings of over 20,000 shekels throughout the loan's term due to this latest prime rate reduction. Larger loans and longer repayment periods will result in greater overall savings.

Mortgage consultants noted that while the benchmark rate has fallen 1.5% from its peak, the decrease is slower than its prior rise. They advise borrowers to evaluate refinancing options and adjust their loan structures and monthly payments, especially those whose loans are directly affected by the Bank of Israel's rate. The association cautioned that loan decisions should not solely rely on future rate predictions, as each loan type carries its own costs and risks.

The rate cut is also anticipated to impact other economic sectors. Following the announcement, the dollar strengthened against the shekel, rising from 3.01 to 3.02 shekels, with potential for further appreciation. A stronger dollar could increase the cost of imports and raw materials, potentially leading to a slight acceleration in inflation. However, past rate cuts have seen temporary dollar gains followed by shekel strengthening.

Additionally, the reduced yield on shekel deposits may lead to a decrease in savings, with some funds potentially flowing into the stock market. Banks may also experience a slight reduction in profits as a consequence of the lower interest rate.