Bank of Israel cuts interest rates, inflation stable despite Iran war

The Bank of Israel reduced its benchmark short-term interest rate for the third time in six months, lowering it to 3.75% from 4%. This decision, announced on Monday, was attributed to a significant appreciation of the Israeli shekel and stable inflation figures.

Inflation held steady at 1.9% in April, remaining within the central bank's target range of 1-3%. However, policymakers expressed ongoing concern about potential renewed price pressures. These concerns are linked to geopolitical developments, which could impact economic activity, energy prices, and government spending.

The shekel has reached a 33-year peak against the U.S. dollar, a factor the central bank believes is helping to moderate inflation. Nevertheless, exporters have called on the Bank of Israel to either lower rates further or intervene in the foreign exchange market to curb the shekel's strength, which can harm their competitiveness.

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There is still significant geopolitical uncertainty, both domestically and globally.

"There is still significant geopolitical uncertainty, both domestically and globally," the Bank of Israel stated. The recent conflict with Iran "had an impact on real economic activity, and the most recent data show a recovery." The bank's staff had previously forecast two rate cuts by early 2027, bringing the policy rate to 3.5%.

The Monetary Committee's policy aims to maintain price stability, support economic activity, and ensure market stability. Future interest rate adjustments will depend on the developments in inflation, economic activity, geopolitical uncertainty, and fiscal conditions.

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The Iran war "had an impact on real economic activity, and the most recent data show a recovery."