Central bank trims borrowing costs to 2022 low, sees room for further rate cuts

Finance minister and manufacturers criticize Bank of Israel’s 0.25% rate cut to 3.5% as insufficient, say it doesn’t reflect the needs of businesses and households

The Bank of Israel on Monday decided to lower interest rates, following the US deal with Iran, eased global geopolitical tensions, and a stable inflation environment, and said it sees the economy growing at a slightly faster pace this year.

The central bank reduced interest rates from 3.75 percent to 3.5%, the lowest level since November 2022. It marked the third rate cut this year, after borrowing costs for households and businesses came down in May and January.

“The Memorandum of Understanding (MOU) signed between the US and Iran led to a decline in energy prices and moderation in global geopolitical tension,” Bank of Israel Governor Amir Yaron said at a press conference in Jerusalem. “However, the level of uncertainty remains high…tension continues in the north, and its ramifications continue to be reflected in economic activity.”

Finance Minister Bezalel Smotrich, who in recent months repeatedly criticized the central bank’s conservative monetary policy, called for steeper interest rate cuts to ease the financial plight of households and businesses, and help weaken the strong shekel, which is harming exporters.

“The minimal interest rate reduction does not match the challenges facing households and businesses, is not aligned with the needs of the economy, and makes things harder for the high-tech sector and exporters,” Smotrich lamented. “A sharp reduction in the interest rate is the step needed that will ease the cost of living and balance the strengthening of the shekel.”

Over the past year, the shekel, which recently reached a 33-year high, has risen by as much as 20% against the dollar despite an economy strained by military campaigns in Iran, Lebanon, and Gaza. The strength of the local currency has been driving up local operational costs, forcing tech exporters and startups to make tough decisions about sweeping layoffs, hiring abroad, and moving R&D centers out of Israel, stirring fears about future growth.

“Given the severity of the crisis facing Israeli exports and industry, the central bank’s move is insufficient,” said the Israel Manufacturers’ Association following the rate decision. “The decline in the economy’s risk level sets the conditions for further and steeper interest rate cuts that would safeguard Israel’s key growth engines and support investment and employment.”

Yaron acknowledged that the “sharp appreciation of the shekel in the recent period poses significant challenges for the export and high-tech sectors, which are key growth drivers of the Israeli economy.”

The Bank of Israel’s research staff expects inflation during 2026 and 2027 to hover around 1.8%, well within the government’s price target range of 1% and 3%. Over the coming year, the central bank forecast that interest rates would be lowered to 3%.

“To the extent that inflation expectations decline more aggressively, and especially if they approach the lower bound of the target range, it will justify more accommodative monetary policy, and at faster paces,” Yaron said.

Still, the governor also cautioned that the inflation environment was greatly influenced by “geopolitical developments in the region and their effects on economic activity and on energy prices,” as well as “fiscal developments,” including the possibility of an increase in the defense budget.

Alongside the rate decision, the central bank said it expected the economy to grow by 4% in 2026, up from its March forecast of 3.8%. In 2027, the pace of growth is expected to pick up to 5.5%, similar to the previous forecast. Israel’s economy grew 2.9% in 2025, which was overshadowed by the war with the Hamas terror group in ⁠Gaza for most of the year and fighting on multiple fronts with Iran-backed proxies.

“Economic activity continues to recover gradually, against the backdrop of domestic and global uncertainty,” said Yaron. “The economy is facing what I have termed a ‘fiscal trilemma’ — the challenge of putting the debt-to-GDP ratio on a declining path while financing defense expenditure and investing in growth drivers.”