Bank of Israel cuts interest rates for first time in nearly 2 years

The Bank of Israel cuts borrowing costs for the first time in almost two years, following last month’s ceasefire agreement with the Hamas terror group in Gaza, and as inflationary pressures have been easing.

Citing a moderate inflation environment and a recovery in economic activity, the central bank lowered interest rates by 25 basis points to 4.25% from 4.5%.

The Bank of Israel last reduced the key lending rate in January 2024, the first cut in almost four years, to support households and businesses as the economy was getting battered by the war with Hamas in Gaza, triggered by the October 7, 2023, onslaught.

“In view of geopolitical developments, economic activity in Israel recovered sharply during the third quarter,” the central bank says in a statement. “There are several risks of renewed acceleration of inflation: geopolitical developments and their impact on economic activity, an increase in demand alongside supply constraints, and fiscal developments.”

Today’s decision was taken by the central bank’s monetary committee, led by Bank of Israel Governor Amir Yaron. Ahead of the interest rate decision, the majority of economists were in consensus that the central bank would lower interest rates as consumer prices continued to moderate in recent months. Israel’s annual inflation rate held steady in October at 2.5%, and remained within the government’s 1%-3% annual target range.

Yaron has come under fierce scrutiny by politicians and manufacturers for failing to lower high borrowing costs as households and businesses struggle to make mortgage and loan repayments during the two-year war with Hamas in Gaza.

Finance Minister Bezalel Smotrich threatened to lower taxes if the central bank did not start cutting interest rates to ease the pressure on borrowers.

A lower interest rate path will come as a relief to some existing and potential mortgage borrowers, as well as households with loans in Israel tied to variable rates.