Bank of Israel Cuts Interest Rate by 0.25% for Second Consecutive Time Amid Moderate Recovery

The Bank of Israel's Monetary Committee decided to reduce the interest rate by 0.25 percentage points to 3.5%, marking the second consecutive cut. This decision follows inflation remaining near the target at 1.9% in May and a continued moderate economic recovery. The committee noted that a recent memorandum of understanding between the United States and Iran contributed to lower energy prices and eased global geopolitical tensions, though uncertainty remains high.

The Bank highlighted that Israel's risk premium is similar to its level before October 7, 2023, while the shekel has depreciated recently amid high volatility. According to the Bank's research division, GDP is forecasted to grow by 4% in 2026 and 5.5% in 2027, assuming no further conflict with Iran and stable low energy prices following the U.S.-Iran agreement. Inflation is expected to average 1.8% in both years.

Fiscal projections indicate that if the defense budget is not increased beyond current reserves, the deficit will reach 4.9% of GDP in 2026 and 4.2% in 2027, with the debt-to-GDP ratio around 69% at the end of both years. The committee emphasized its ongoing focus on price stability, supporting economic activity, and maintaining market stability. Future interest rate decisions will depend on inflation trends, economic conditions, geopolitical uncertainty, and fiscal developments.

Finance Minister Bezalel Smotrich criticized the modest rate cut, calling it insufficient to address household and business challenges. He urged the Bank of Israel to implement a sharper rate reduction, arguing that a more significant cut would help ease living costs and balance the shekel's recent strengthening, benefiting the high-tech and export sectors.