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% — a contrast to a trend to tighter policy by other central banks.
It had cut in November and January, following the Gaza war, but paused in its two subsequent decisions due to the conflict with Iran and fears of a spike in supply-driven inflation. It resumed reductions in May.
The annual inflation rate held at 1.9% in May, well within a 1-3% target.
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.
“To the extent that inflation expectations decline, and especially if they approach the lower bound of the target range, it will justify more accommodative monetary policy, and at faster paces,” the bank’s Governor Amir Yaron told a news conference.
Jonathan Katz, chief economist at Leader Capital Markets, called the rates decision and forecast of rates moving to 3% as “dovish”, reflecting a loose policy.
Policymakers remain cautious over where inflation is headed. In the rates decision statement, the monetary policy committee believes there are a host of opposing influences.
“The inflation environment is greatly influenced by geopolitical developments and their effects on economic activity and on energy prices, by the risk premium and the (dollar-shekel) exchange rate, by the development of demand alongside supply constraints, and by fiscal developments,” the bank said, also pointing to a tight labour market and rising wages.
Despite the end of fighting between Israel and Iran for now, the central bank stressed the level of uncertainty on the geopolitical front remained high.
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 and 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.
(Reporting by Steven Scheer;Additional reporting by Lina Obeid;Editing by Tomasz Janowski and Ros Russell)
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