Bank of Israel Faces Decision on Third Interest Rate Cut Amid Economic Uncertainty
The Bank of Israel is expected to announce a third interest rate cut this year on Monday, potentially lowering the central bank rate to 3.5% and the prime rate to 5%. This would mark the lowest interest rate since late 2022, before the recent series of rate hikes. The move aims to reduce mortgage repayments by thousands of shekels over the loan term and provide crucial relief to the business sector struggling with financing costs. Earlier this year, rates were cut from 4.0% in January to 3.75% in May.
The decision comes amid a complex macroeconomic environment. Supporters of the cut highlight the inflation rate's drop to 1.9%, well within the government's 1%-3% target range, alongside stagnant economic growth, reduced military activity, and a capped defense budget increase of 15 billion shekels instead of the 40 billion originally requested. These factors contribute to lower economic uncertainty.
However, the Bank of Israel faces risks that could hinder a rate cut, including recent strengthening of the dollar and euro against the shekel, which may raise import costs, ongoing political instability, and concerns that last-minute election-related spending could breach budget limits. There is also worry that previous rate cuts could reignite inflation.
Despite these risks, financial experts express optimism. Samuel Katzavian of Discount Bank and Ofer Klein of Harel Insurance believe conditions favor a 0.25% cut. Psagot Investments supports this view, citing falling global oil prices and expectations of a negative June consumer price index. Meanwhile, business leaders are pressing Governor Amir Yaron for a sharper 0.5% reduction. Chen Schreiber, president of the Israeli Accountants Association, urged the governor to act boldly, recalling that the previous quarter-point cut was seen as insufficient. Roy Cohen, president of the Association of Independent Organizations, also called for immediate action to ease business pressures in Israel.
