The Bank of Israel lowered its key interest rate to 3.50% from 3.75% on Monday, the institution said in a policy announcement. This marks the second consecutive cut to the benchmark rate and places borrowing costs at their lowest level since late 2022.
The decision aligned with the median estimate in a Bloomberg survey. In explaining its action, the central bank pointed to the persistent strength of the Israeli shekel and moderate inflation expectations as dominant considerations that outweighed projections for faster economic growth.
Policymakers remain under growing pressure to respond to the currency's appreciation through lower interest rates. Israeli exporters, particularly technology firms, have publicly raised concerns about how a persistently strong shekel affects their competitiveness and operations.
Finance Minister Bezalel Smotrich has repeatedly urged the Bank of Israel to enact rate reductions, adding to the public and political debate over monetary policy stance.
Market moves around the recent policy shift were notable. The shekel weakened by more than 5% against the dollar last month after the central bank resumed cutting rates, placing it among the poorest performers in Bloomberg's expanded basket of global currencies. Despite that recent decline, the currency remains close to levels described in the bank's statement as among the strongest seen in decades.
The central bank preserved its forward guidance in the policy release, saying that future rate decisions "will be determined based on inflation dynamics, economic performance, geopolitical uncertainty, and fiscal developments."
Bank research included in the release projects that inflation will be 1.8% by the end of the second quarter of 2027, at which point interest rates are assumed to be 3%.
With the policy shift and accompanying projections, market participants and policy watchers will be assessing the implications for exporters, financial conditions, and the trajectory of inflation as the economy evolves.