By Steven Scheer
JERUSALEM, July 6 (Reuters) – The Bank of Israel cut short‑term interest rates for a second straight meeting on Monday, citing stable inflation and a U.S.–Iran ceasefire deal that has pushed down energy prices, and suggested rates would likely fall further.
The central bank, as widely expected, reduced its benchmark rate to 3.5% from 3.75% — its lowest level since early 2023 and a contrast to a trend to tighter policy by other central banks.
“Under our base case scenario, we see the interest rate continuing to fall to at least the 3% range,” Bank of Israel Governor Amir Yaron told Reuters after the decision. A rate of 3% should keep inflation around a 2% rate, he said.
It was the fourth rates reduction in its current cycle that began last November following the Gaza war. It paused during the conflict with Iran in March and April due to fears of a spike in supply-driven inflation but resumed reductions in May.
The annual inflation rate held at 1.9% in May, well within a 1-3% target.
Yaron said that a strong shekel against the dollar has helped to contain inflation, along with a drop in energy prices and a labour market that has improved with thousands of workers returning from reserve duty.
But despite the success of monetary policy in containing inflation, “we must continue to act responsibly because there is geopolitical uncertainty”, he said, adding the path of rate cuts depended on inflation, geopolitics and budget policy.
Should inflation expectations keep declining, “then we can act with a more expansionary monetary policy.”
In updated estimates, the central bank’s staff forecast an inflation rate of 1.8% by the end of 2027. As a result, its staff estimates the interest rate slipping to 3% in the coming year.
Jonathan Katz, chief economist at Leader Capital Markets, called the rates decision and forecast of rates moving to 3% “dovish,” reflecting a loose policy.
Policymakers remain cautious over where inflation is headed. In the rates decision statement, the monetary policy committee states there are a host of opposing influences such as geopolitical developments and their impact on economic activity, energy prices, the shekel rate, fears of looser fiscal policies due to a spike in defence spending, a tight labour market and rising wages.
The bank expects no new fighting with Iran on the horizon, while it also expects the intensity of fighting between Israel and Hezbollah in Lebanon to subside and contribute to the easing of supply constraints.
The conflict with Iran led to a 3.8% economic contraction in the first quarter. The Bank of Israel, though, noted that since the war’s end the economy has rebounded and is now expected to grow 4% in 2026 and 5.5% in 2027.
After reaching a 33-year high against the dollar, the shekel weakened 3.1% since the last decision on May 25. In May, the central bank bought $801 million of foreign currency to try to weaken the shekel along with its rate cut.
The shekel slipped 0.1% versus the dollar to a rate of 3.0 after the rate action on Monday.
The Bank of Israel also said it had moved its next rates decision to September 1 from a planned August 31 due to a scheduling conflict with the Jackson Hole symposium.
Referring to the government’s statement on Sunday it would not abide by a Supreme Court ruling, Yaron said: “Disobedience undermines the foundations of democracy and can create uncertainty in the economy.”
(Reporting by Steven Scheer;Additional reporting by Lina Obeid;Editing by Tomasz Janowski and Ros Russell)
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