Bank of Israel Expected to Cut Interest Rate Again, Easing Mortgage Costs

The Bank of Israel is set to announce a second consecutive interest rate cut today, lowering the rate from 3.75% to 3.5%, with the prime rate dropping from 5.25% to 5%. This decision follows a year of stable rates and comes amid an annual inflation rate of 1.9%, which provides the bank with room to reduce rates without risking inflation spikes. The announcement will also include an updated economic growth forecast, the first since the end of the "Roaring Lion" military operation and the fragile ceasefire in Lebanon.

Economists highlight that the main driver for the rate cut is the moderate inflation level, which is comfortably within the target range of 1% to 3%. Additionally, the Bank of Israel aims to support economic activity after a 3.3% contraction in the first quarter of the year and a still-moderate recovery. However, the bank is cautious about the pace of cuts due to concerns about the Israeli shekel’s exchange rate and geopolitical risks, including regional tensions and the ongoing uncertainty in northern borders.

For consumers, the rate cut translates into tangible savings, particularly for mortgage holders linked to the prime rate. The average borrower with a 450,000 shekel mortgage over 25 years could save approximately 66 shekels per month, totaling nearly 20,000 shekels over the loan period. This easing is already encouraging increased activity in the housing market, including more buyers and refinancing inquiries. Businesses are also expected to benefit from lower borrowing costs.

Looking ahead, economists predict further rate reductions, potentially bringing the rate down to around 3% within a year, barring any sudden security deteriorations. However, long-term interest rates, which affect fixed-rate mortgages, may remain elevated due to increased government borrowing to fund defense spending and budget deficits. The updated growth forecast released alongside the rate decision will be closely watched, as it will reflect the bank’s assumptions about the economic recovery pace and influence future monetary policy.

The Bank of Israel Governor, Professor Amir Yaron, will present the decision and economic outlook later today, providing clarity on the central bank’s stance amid ongoing regional and economic uncertainties.