Key facts
- The Bank of Israel reduced its benchmark interest rate by 25 basis points to 3.5%.
- Inflation held steady at 1.9% in May, within the central bank's target range.
- The decision was influenced by a U.S.-Iran ceasefire that lowered energy prices.
- The central bank's staff forecast inflation to be 1.8% by the end of 2027.
- The Israeli economy is projected to grow 4% in 2026 and 5.5% in 2027.
- The shekel weakened 3.1% against the dollar since the previous rate decision.
The Bank of Israel lowered its benchmark interest rate by 25 basis points to 3.5% on Monday, marking its second consecutive cut. This decision was influenced by stable inflation, which stood at 1.9% in May and remains within the central bank's 1-3% target range, and a U.S.-Iran ceasefire that has led to a decrease in energy prices.
Policymakers, however, expressed caution regarding the future inflation environment, noting a "host of opposing influences" including geopolitical developments, exchange rate fluctuations, demand alongside supply constraints, and fiscal developments. Despite the ceasefire, the bank stressed that geopolitical uncertainty remains high.
The conflict with Iran had previously led to a 3.8% economic contraction in the first quarter. However, the economy has since rebounded and is now expected to grow 4% in 2026 and 5.5% in 2027.
The Israeli shekel weakened by 3.1% against the dollar since the last rate decision on May 25. In May, the central bank intervened by purchasing $801 million of foreign currency to help weaken the shekel. Following Monday's rate action, the shekel slipped 0.1% versus the dollar to a rate of 3.0.
The Bank of Israel also announced that its next interest rate decision will be on September 1, moved from August 31 due to a scheduling conflict with the Jackson Hole symposium.