The Bank of Israel Monetary Committee lowered the national interest rate to 3.50% from 3.75%, the bank announced on Monday.
The decision was made in response to the shekel's strength and a decline in inflation, though economic actors, notably exporters, were pressing for a sharper reduction. This is the second cut to interest rates after an initial 0.25% decrease at the bank's recent meeting in late May.
"The inflation rate in May remained stable around the midpoint of the target range, and the risk premium is similar to before October 2023,” the Bank of Israel said. “Overall during the reviewed period, the shekel depreciated with high volatility."
The bank also cited the Memorandum of Understanding between the US and Iran as a primary factor behind the lowered interest rate, noting declines in energy prices and the stabilization of geopolitical tensions. However, uncertainty around the situation with Iran persists.
That same uncertainty is why the Bank of Israel decided to leave interest rates unchanged at 4% in March of this year, even though inflation was within the target range.
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Finance Minister Bezalel Smotrich responded to the new interest rate in a post on his X/Twitter.
"The minimal reduction in the interest rate does not match the challenges facing households and businesses, is not connected to the needs of the economy, and makes it harder for the high-tech sector and exports," he said. "A sharp reduction in the interest rate is the right step that will ease the cost of living and balance the strengthening of the shekel."
The Bank of Israel Research Department also predicts GDP growth of 4% by the end of 2026, rising to 5.5% in 2027. However, this is dependent on external budget calls.
"The Research Department’s assessment is that if the defense budget is not increased beyond the buffer reserved in the State budget, the government’s budget deficit is expected to be 4.9% of GDP in 2026 and 4.2% of GDP in 2027,” the bank added.
Additionally, the annual rate of increase in the housing component of the Consumer Price Index rose to 4% in May.