Bank of Israel Cuts Interest Rate to 3.75% for the First Time Since January

The Bank of Israel’s Monetary Committee decided today (Monday) to cut the benchmark interest rate from 4% to 3.75% — the second reduction this year and the first since early January. The decision was largely anticipated, though some had expected a deeper cut. The bank’s statement noted that “local and global geopolitical uncertainty remains significant.” Contractors responded with measured disappointment: “The Bank of Israel is moving in the right direction but at too slow a pace.”

By Nimrod Bousso, Nadlan Center

The Bank of Israel’s Monetary Committee decided today (Monday) to lower the interest rate from the current 4% to 3.75%, after two consecutive decisions in which the rate was left unchanged, and for the first time since the beginning of January. The decision to cut rates was widely expected, against the backdrop of the sharp decline in the dollar exchange rate, with forecasts placing the reduction between 0.25 and 0.5 percentage points. This is the second time this year that the Monetary Committee has decided on a reduction; the previous cut was carried out on January 5, when the Bank of Israel lowered the rate by a quarter of a percentage point to 4%.

The bank’s statement noted that “local and global geopolitical uncertainty remains significant. Operation ‘Lion’s Roar’ has had implications for real economic activity, though the latest data point to a recovery. Inflation in Israel continues to hover around the midpoint of the target range; however, since the last interest rate decision, there has been a sharp rise in the global inflation environment. During the reviewed period, the shekel strengthened against the dollar and stood out relative to the global trend.”

The statement also addressed the shekel’s appreciation: “Since the last interest rate decision, the shekel has strengthened by 8.3% against the dollar and by 7.2% against the euro. In nominal effective terms, the shekel strengthened by 7.4%.” At the same time, the statement added, “the Committee assesses that risks to a renewed rise in inflation exist, including geopolitical developments and their effects on economic activity and energy prices, an increase in demand alongside supply constraints and fiscal developments — while the shekel’s appreciation may act to moderate inflation.”

The decision drew a mildly disappointed reaction from contractors. Amit Gottlieb, Vice President of the Israel Builders Association, stated that “the Bank of Israel is moving in the right direction, but at too slow a pace. The economy in general, and the housing market and construction and infrastructure sector in particular, require far more dramatic support. The positive results in tax revenues, the return to the inflation level the Bank of Israel was targeting, and the low unemployment rate already warranted a larger rate cut — and we hope the bank will do so in its next decision.”

The Israel Mortgage Advisors Association: “An Important Step That Provides Some Relief”

The Israel Mortgage Advisors Association welcomed the Bank of Israel’s decision, stating that the move “to reduce the interest rate and set it at 3.75%, during a period of security uncertainty, slowing growth, and ongoing erosion of household repayment capacity, is an important step that provides some relief to borrowers in Israel.”

“The current rate cut follows previous reductions, so that since the peak rate of 4.75%, there has already been a cumulative decrease of a full percentage point in the Bank of Israel’s interest rate. This is a positive development for the market and for borrowers, particularly against the backdrop of the shekel’s strengthening against the dollar, the moderation of inflation to an annual rate of 1.9%, and the recent decline in Israel’s risk premium — data that expand the Bank of Israel’s room to continue cutting rates going forward.”

At the same time, the association emphasized that “even after the cut, the interest rate in Israel remains high and the mortgage burden remains heavy. On a mortgage of one million shekels over 25 years, of which 450,000 shekels are in the prime-rate track, a 0.25% rate reduction could lower the monthly repayment by approximately 67 shekels and save around 20,000 shekels over the life of the loan. Even after this relief, monthly repayments are still significantly higher than in the years before the interest rate hike cycle, alongside a steady increase in the average mortgage due to housing prices, and many households continue to bear a heavy financial burden.”

The association also stressed that responsibility does not end with the Governor’s decision: “The banking system must pass on the full rate reduction to the public in a complete, swift, and transparent manner, and the government must seize the window of opportunity to address the cost of living and high housing prices, which are pushing young families out of the ability to purchase a home.”