Central Bank of Israel reduces basic interest rate

The Bank of Israel cut short-term interest rates on Monday (25) for the first time since January, citing a strong appreciation of the shekel and stable inflation, although it warned that future cuts will be gradual, as uncertainty regarding the war with Iran remains high.

The Israeli Central Bank, as expected, reduced the basic interest rate from 4% to 3.75%. The central bank had reduced the rate in November and January.

The fact that annual inflation remained at 1.9% in April, within the 1% to 3% target, was the main factor for the easing of monetary policy, according to Andrew Abir, from the Bank of Israel.

Controlled inflation was possible due to the strong appreciation of the shekel to its highest level in 33 years against the dollar.

"This certainly gives us room to reduce rates, even with geopolitical uncertainty," Abir told Reuters.

Still, while geopolitical risks have diminished, they have not gone away and "that means they need to be more cautious about the pace at which they change interest rates," he added.

In March, the Bank of Israel had forecast two interest rate cuts by early 2027, or a base rate of 3.5%. Future rate cuts, according to Abir, depend on economic data.

The US and Israel launched attacks against Iran on February 28. A ceasefire signed on April 8 has held, but remains fragile.

Finance Minister Bezalel Smotrich classified the 0.25 percentage point cut as "insufficient and late" and stated that a larger cut was necessary "to make life easier for exporters, families and businesspeople".

"We are not trying to surprise the markets", highlighted Abir. "We are trying to define a level of monetary policy compatible with inflation expectations and what is happening in the real economy," he continued.

Why is the Strait of Hormuz so important to the world economy?

Source: CNN