Bank of Israel Cuts Interest Rate by 0.25% for Second Consecutive Time in 2026
Translated & summarized from Ynet by baba
The Bank of Israel cut its base interest rate by 0.25% to 3.5% on Monday, the second consecutive reduction in 2026, aiming to ease mortgage and business loan costs amid political uncertainty. The bank also raised its economic growth forecast for 2026 and 2027 while lowering inflation expectations. Finance Minister Bezalel Smotrich criticized the modest cut, calling for a more significant reduction to address economic challenges.
The story in 6 lines · by baba
- Bank of Israel cuts interest rate by 0.25% to 3.5%, second consecutive cut in 2026.
- Rate cut aims to reduce mortgage payments and ease business borrowing costs amid conflict.
- Economic growth forecast raised to 4% in 2026 and 5.5% in 2027; inflation forecast lowered to 1.8%.
- Two more rate cuts expected in 2027, with average rate at 3% in Q2 2027.
- Budget deficit projected at 4.9% of GDP in 2026; defense spending increase could raise inflation.
- Governor Yaron highlights economic benefits of integrating Haredi population into workforce.
On Monday afternoon, the Bank of Israel announced a 0.25% reduction in the base interest rate, marking the second consecutive cut and the third since the start of 2026. The base rate now stands at 3.5%, with the prime rate at 5%. The Monetary Committee, led by Governor Professor Amir Yaron, chose to lower the rate despite ongoing political uncertainty and concerns about government spending ahead of the election announcement. This rate cut is expected to reduce monthly mortgage payments and ease borrowing costs for businesses affected by the ongoing conflict.
The Bank of Israel also released an updated macroeconomic forecast, projecting 4% economic growth in 2026 and 5.5% in 2027, revisions upward from March forecasts due to stronger-than-expected national accounts data in Q1. Inflation is forecasted at 1.8% for 2026, down from the previous 2.2%, influenced by a reduced risk premium following the end of Operation "Roaring Lion," a stronger shekel, and a sharp drop in oil prices after the reopening of the Hormuz Strait. The interest rate is expected to average 3% in Q2 2027, with two additional rate cuts anticipated during the year.
The budget deficit is projected 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 defense spending for 2026, slightly above the allocated reserve. However, the Bank warns that an additional increase of up to 25 billion shekels, as requested by the defense establishment, could raise the deficit, debt, and inflation by 0.2% to 0.5%.
Governor Yaron addressed the economic implications of the "Torah Guardians" law, emphasizing the importance of integrating the Haredi population into the workforce and military, noting that 7,500 additional Haredi recruits could add 10 billion shekels annually to the economy, equivalent to 0.5% of GDP. Finance Minister Bezalel Smotrich criticized the modest rate cut, calling it insufficient for the economic challenges and urging a sharper reduction to ease living costs and support the high-tech and export sectors amid a strengthening shekel.
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