Bank of Israel Cuts Interest Rate to 3.5% Amid Inflation Easing and Shekel Strengthening

The Bank of Israel announced a reduction in the key interest rate by 0.25 percentage points, lowering it from 3.75% to 3.5%. This marks the third rate cut since the beginning of 2026, following previous reductions in January and May, reflecting a continued easing of monetary policy. The decision was driven by a moderation in inflation, which remains within the target range of 1% to 3%, alongside a significant strengthening of the Israeli shekel against the US dollar in recent months.

Since March, the shekel has appreciated by over 7% against the dollar, contributing to lower import prices and easing inflationary pressures. Core inflation, which excludes volatile components such as energy and food, has also remained at comfortable levels according to the Bank of Israel. These factors provided the Monetary Committee with the flexibility to further reduce the interest rate while maintaining price stability.

Market attention is now focused on the signals from Bank of Israel Governor Amir Yaron regarding the future path of interest rates. Investors are keen to understand whether additional rate cuts are expected in the coming months or if the bank will adopt a more cautious stance due to uncertainties related to the labor market, fiscal policy, and security situation. Analysts anticipate a gradual approach without a fixed schedule for further reductions.

The rate cut will directly affect households, with the prime interest rate expected to drop from 5.25% to 5%, easing mortgage payments on prime-linked loans. Estimates suggest that each 0.25% rate cut reduces monthly repayments by about 13 shekels per 100,000 shekels borrowed. The real estate and stock markets may benefit from lower financing costs, potentially boosting demand for housing and increasing stock market attractiveness. Conversely, returns on bank deposits and money market funds are likely to decline if the rate-cutting trend continues.