Bank of Israel Cuts Interest Rate, Slashing Mortgage Payments by Tens of Thousands

The Bank of Israel announced a 0.25% interest rate cut on Monday, effective Thursday, significantly reducing monthly mortgage payments for borrowers. This marks the third rate reduction this year, cumulatively saving mortgage holders around 300 shekels per month on a 25-year loan, amounting to tens of thousands of shekels over the loan term. Businesses with multi-million shekel loans will also benefit from thousands of shekels in reduced repayments, potentially saving hundreds of thousands annually.

The rate cut is expected to impact nearly all sectors of the economy. Forecasters predict the US dollar will strengthen against the shekel, reaching approximately 3.10 shekels per dollar. This dollar appreciation may increase the cost of imported goods and raw materials, potentially pushing inflation slightly higher in the coming months. Additionally, the shekel's weakening and lower interest rates are likely to reduce shekel deposits, with some funds expected to flow into the stock market, potentially driving share prices up over time. However, the rate cut will somewhat reduce bank profits.

Following the prime rate reduction, mortgage repayments, especially those linked to the prime rate, have eased considerably. Meir Wider, CEO of Wider Mortgages, highlighted the substantial impact on 25-year mortgages due to the three rate cuts this year. Concurrently, the Bank of Israel released an updated macroeconomic forecast projecting 4% GDP growth in 2026 and 5.5% in 2027, revisions upward from March's forecast, driven by stronger-than-expected national accounts data in Q1.

Inflation is expected to average 1.8% in 2026, down from the previous 2.2% forecast, influenced by reduced risk premiums following the end of Operation "Roaring Lion," a stronger shekel, and a sharp drop in oil prices after the reopening of the Strait of Hormuz. The interest rate is projected to average 3% in Q2 2027, with two additional cuts anticipated next year. The government budget deficit is forecasted at 4.9% of GDP in 2026 and 4.2% in 2027, with the debt-to-GDP ratio stabilizing around 69%. The baseline scenario assumes a 15 billion shekel increase in the defense budget in 2026, slightly above the allocated reserve. However, the Bank warns that a further increase of up to 25 billion shekels, as demanded by the defense establishment, could raise the deficit, debt, and inflation by 0.2% to 0.5%.