Bank of Israel Cuts Interest Rate for Third Consecutive Time

The Bank of Israel has reduced its benchmark interest rate by a quarter of a percentage point, from 3.5% to 3.25%, marking the third consecutive rate cut. This decision followed a period of debate among economists, with some citing low inflation and a strong shekel as reasons for a further reduction, while others pointed to rising geopolitical uncertainty, energy prices, and a tight labor market as justifications for holding steady.

The central bank noted in its accompanying statement that inflation has moderated in recent months, with its rate below the target range. While second-quarter growth figures showed a significant increase, the bank clarified that this was partly due to the recovery from the first quarter's "Operation Iron Swords" and that, excluding the activity of Israeli companies abroad, the growth picture is more moderate. Annual inflation stood at 1.5% in July, with the consumer price index rising 0.3% that month. Inflation excluding energy and fresh produce was also 1.5%, and the rise in prices of non-tradable goods slowed to 2.5%.

Despite the rate cut, the Bank of Israel highlighted that geopolitical tensions continue to pose a risk, although Israel's risk premium and exchange rate have remained relatively stable. Energy prices, particularly Brent crude oil, have risen significantly, and natural gas prices in Europe have reached their highest levels since the start of "Operation Iron Swords." The widening interest rate differential between Israel and the United States could impact the shekel and government bond pricing.

The bank also addressed fiscal policy, noting that the cumulative deficit for the 12 months ending in July was 3.4% of GDP, below the target for 2026. However, uncertainty remains regarding potential increases to the defense budget and how they will be financed. The Bank of Israel did not commit to further rate reductions, stating that future decisions will depend on inflation, economic activity, geopolitical uncertainty, and fiscal developments. The next interest rate decision is scheduled for October 21st.