Bank of Israel Cuts Key Interest Rate Again, Lowering Borrowing Costs

The Bank of Israel has again reduced its benchmark interest rate, this time to 3.25% annually. This marks the fourth rate cut this year and the fifth since November of the previous year. The decision is expected to benefit Israelis with outstanding debts, particularly those with mortgages tied to the prime rate, known as 'mashkanta' in Hebrew. Lowering the interest rate decreases the prime rate, making loan servicing cheaper, especially for borrowers with a significant portion of their mortgage linked to it. Families with large mortgages could see monthly savings of hundreds of shekels. The rate reduction also impacts other variable-rate loans, including consumer credit and overdrafts, potentially leading to noticeable savings for households managing multiple debts or account deficits.

However, the move has a downside for savers. Individuals who rely on bank deposits for income will likely face lower returns as banks have less incentive to offer high interest rates on new deposits. The cheaper mortgage rates could also stimulate demand for housing, potentially making apartment purchases more accessible for some buyers and drawing back those who had postponed decisions due to high borrowing costs. This increased demand, however, might lead to rising property prices, creating a dual effect of lower monthly payments but potentially higher purchase costs.

The Bank of Israel's decision reflects an improving economic climate and moderating inflation. Annual inflation stood at 1.5% in July, within the central bank's target range of 1-3%. This low inflation provides the regulator with flexibility to further ease monetary policy. The current rate cut cycle began in November 2025 with a reduction from 4.5% to 4.25%, followed by subsequent decreases in 2026: to 4% on January 5, to 3.75% on May 25, to 3.5% on July 6, and finally to the current 3.25% on September 1. Overall, the cost of money in the Israeli economy has decreased by 1.25 percentage points since November.