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 inflation stabilization, with the annual inflation rate at 1.9%, comfortably within the bank's target range of 1% to 3%. The rate cut aims to support economic activity after a 3.3% contraction in GDP during the first quarter and to provide relief amid ongoing geopolitical uncertainties.

Economists caution that the reduction is modest, a quarter percentage point, due to concerns over the Israeli shekel's exchange rate and regional geopolitical risks, including tensions on the northern border and U.S.-Iran relations. The Bank of Israel prefers gradual adjustments to avoid market shocks. The rate cut is expected to save mortgage borrowers approximately 66 shekels per month on an average 450,000 shekel loan tied to the prime rate, amounting to nearly 20,000 shekels over the loan term. This easing may encourage increased activity in the real estate market and mortgage refinancing.

Beyond households, businesses taking credit are also likely to benefit from lower borrowing costs. Looking ahead, analysts 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 influence fixed mortgage costs, may remain elevated due to increased government borrowing to finance defense spending and budget deficits.

Alongside the rate decision, the Bank of Israel will release an updated economic growth forecast, the first since the end of Operation "Roaring Lion" and the fragile ceasefire in Lebanon. This forecast will reflect new assumptions about the security situation and will influence the bank's future monetary policy stance. The official announcement and explanations will be delivered by Governor Amir Yaron later today.