Bank of Israel Cuts Key Interest Rate for Third Time

The Bank of Israel announced on Tuesday its third consecutive interest rate cut, reducing the benchmark rate by 0.25 percentage points to 3.25%. The prime lending rate will consequently fall to 4.75%. This move follows previous reductions in May and July, continuing a trend that has seen the rate decrease by a cumulative 1.5% from its 2023 peak.

The most significant impact of this rate cut is on mortgage payments, particularly for those with loans tied to the prime rate. For a prime-rate mortgage component of one million shekels, a 0.25% reduction translates to an average monthly saving of over 140 shekels, or approximately 43,000 shekels over a 25-year term. Mortgages with variable rates, whether indexed or not, will not see immediate changes but may be adjusted at contractually set intervals. Those with fixed-rate mortgages are not directly affected but could explore refinancing to benefit from the lower rate environment, subject to associated costs and conditions.

For savers and investors in low-risk assets, the rate cut signals a decrease in returns. Money market funds, which invest in short-term instruments, are highly sensitive to interest rate changes. Investors who have become accustomed to yields of 4% or more from these conservative options may see those returns diminish as the central bank lowers rates.

Similarly, while existing bond prices are expected to rise, potentially benefiting current holders, new bond purchases after the rate cut may offer lower redemption yields due to prevailing market conditions. In essence, the rate reduction primarily benefits borrowers, especially those with prime-rate mortgages, while leading to lower returns for savers and investors in stable, low-risk financial products.