Bank of Israel Cuts Interest Rate Again, Impacting Mortgages and Deposits

The Bank of Israel's Monetary Committee has reduced its benchmark interest rate by 0.25% to 3.25%, marking the third consecutive cut and the fourth since the beginning of 2026. This decision, effective tomorrow, lowers the prime lending rate, from which most loans and mortgages are derived, to 4.75%. The move is attributed to a low annual inflation rate of 1.5%, well below the target range, and robust economic growth in the second quarter, which saw a 15.4% annualized expansion, though the article clarifies this figure is inflated by post-war recovery and a more realistic rate is around 3%-3.5%. The strong shekel also contributed to the committee's decision, providing room for easing despite geopolitical uncertainties and volatile global bond markets.

The immediate impact of the rate cut is most noticeable on mortgage payments, specifically for loans tied to the prime rate. For a mortgage of 1 million shekels over 25 years with one-third of the balance on the prime track, the monthly payment will decrease by approximately 51 shekels, saving about 15,000 shekels over the loan's life, assuming the rate remains stable. Loans with a larger portion on the prime or variable tracks will see higher savings, while those with conservative structures will experience minimal reductions. The article notes that borrowers who opted for fixed-rate certainty continue to pay a premium.

For those considering refinancing, the situation is more complex. While short-term rates are falling, long-term fixed rates are influenced by bond market yields, which have already priced in much of the expected rate reductions. Refinancing based solely on anticipated further rate decreases might prove unnecessary. The article also provides a calculator for personalized impact assessments.

On the deposit side, the transmission of the rate cut is less direct. Banks are expected to pass on only about 0.15% of the reduction to savings accounts, lowering average rates from around 2.95% to approximately 2.8%. This translates to a net difference of about 255 shekels annually on a 200,000 shekel deposit. While real yields remain positive with 1.5% inflation, the buffer is shrinking. The article reminds readers that deposit rates are often negotiable.

The rate cut is generally seen as supportive for long-term government bonds and real estate stocks, while potentially decreasing bank profit margins. The next interest rate decision is scheduled for about a week before the upcoming Knesset elections, with forecasts suggesting a further rate cut in the coming year, potentially bringing the average rate down to around 3% by the second quarter of 2027.