{"id":130647,"date":"2026-05-25T19:30:15","date_gmt":"2026-05-25T19:30:15","guid":{"rendered":"https:\/\/www.europesays.com\/iran\/130647\/"},"modified":"2026-05-25T19:30:15","modified_gmt":"2026-05-25T19:30:15","slug":"bank-of-israel-cuts-borrowing-costs-while-flagging-geopolitical-risks","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/iran\/130647\/","title":{"rendered":"Bank of Israel cuts borrowing costs, while flagging geopolitical risks"},"content":{"rendered":"

The Bank of Israel on Monday decided to lower interest rates by 0.25 percentage points, citing a strong shekel and stable inflation environment, but warned that geopolitical uncertainty over the war with Iran remained \u201csignificant.\u201d<\/p>\n

As was widely anticipated, the central bank, led by Governor Amir Yaron, trimmed borrowing costs from 4% to 3.75%, marking the second rate cut this year. In its previous two rate decisions in March and February, the Bank of Israel left borrowing costs on hold, after two cuts in November and January.<\/p>\n

\u201cWith the outbreak of the US-Israel war with Iran in February, the central bank paused rate cuts because of the uncertainty around defense spending and the impact of hostilities on the economy and inflationary pressure,\u201d IBI investment house chief economist Rafi Gozlan told The Times of Israel. \u201cWith the talks over an agreement to end the war indicating a decline in geopolitical risk, and a strong shekel curbing price increases, keeping inflation stable, the central bank felt comfortable adjusting interest rates downwards.\u201d<\/p>\n

US President Donald Trump declared over the weekend that the US and Iran were on the cusp of finalizing a deal to end the war launched jointly by the US and Israel against the Islamic Republic on February 28. However, Iran and the US on Monday played down hopes<\/a> for an imminent signing of an agreement to end the war, which has been in a fragile ceasefire since early April.<\/p>\n

\u201cThere is still significant geopolitical uncertainty, both domestically and globally,\u201d the central bank said in a statement. \u201cOperation Roaring Lion had an impact on real economic activity, and the most recent data show a recovery.\u201d<\/p>\n

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The central bank noted that \u201cinflation in Israel remains around the midpoint of the target,\u201d while the shekel appreciated by 8.3% against the dollar since the previous interest rate decision. The most recent data showed the annual inflation in April was steady at 1.9%, and remained well within the government\u2019s target range of between 1% and 3%.<\/p>\n

\t\"\"<\/a>
\n\t\tIllustrative: Shoppers evacuate Jerusalem\u2019s Mahane Yehuda market and seek shelter as an air raid siren goes off on March 13, 2026. (Chaim Goldberg\/FLASH90)<\/p>\n

The overly strong shekel has a deflationary force, as it makes imports cheaper, restrains price increases and credit costs for consumers, and enables the Bank of Israel, which is concerned about price stability, to lower interest rates. Meanwhile, the shekel\u2019s 20% appreciation against the dollar over the past year has been hurting exporters\u2019 competitiveness and profitability as they earn in dollars but pay expenses in shekels. Exports make up as much as 40% of Israeli economic activity.<\/p>\n

Local manufacturers and exporters accused Yaron for doing too little too late to help moderate gains in the shekel, which has been trading at a 33-year high against the US dollar. Exporters have been warning that the local currency\u2019s strength poses a risk to growth prospects in the economy, and are calling for a bigger interest rate cut and intervention in the foreign exchange market.<\/p>\n

\u201cThe Bank of Israel is losing credibility by ignoring the inflation situation, the decline in the risk premium, and exchange rate movements,\u201d the Israel Manufacturers\u2019 Association said. \u201cIsrael has become an island of high interest rates in a global reality of falling interest rates, and the real interest rate differentials attract a heavy flow of foreign capital, which injects more dollars into the local market and fuels the destructive appreciation of the Israeli currency.\u201d<\/p>\n

In recent months, Yaron has come under fierce criticism from politicians and manufacturers for hesitating to take immediate action to lower high borrowing costs more aggressively and ease the plight for exporters, households, and businesses.<\/p>\n

\u201cA 3.75% interest rate still reflects a relatively high real interest rate,\u201d Leader Capital Markets macroeconomist Jonathan Katz said. \u201cAt this stage, it does not appear that the Bank of Israel will combine a rate cut with intervention in the foreign exchange market, although that remains a possibility.\u201d<\/p>\n

\u201cIf the ceasefire is implemented, we expect another cut in July,\u201d Katz said.<\/p>\n

\t\"\"<\/a>
\n\t\tIllustrative. A shekel coin and a US hundred-dollar bill, April 13, 2026. (Nati Shohat\/Flash90)<\/p>\n

Gozlan noted that while lower interest rates make the currency less attractive to investors seeking high returns, the central bank \u201cunderstands that by lowering interest rates, it will not be able to change the shekel trend.\u201d<\/p>\n

\u201cThe strength of the shekel is driven mainly by a globally weak dollar, the strong correlation between global equity prices and the exchange rate, and an influx of large foreign investments into Israel,\u201d he said. \u201cAs US stock markets have been rising in the past year, the value of assets of Israeli institutional investors in major Wall Street stocks increases, which in turn means that they are required to balance the increase by selling dollars and increasing their exposure to the shekel, which strengthens the local currency.\u201d<\/p>\n

\u201cWithout a change in this trend, the shekel will continue to strengthen,\u201d said Gozlan.<\/p>\n


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