The Bank of Israel on Monday cut borrowing costs for the first time in almost two years, following last month’s ceasefire agreement with the Hamas terror group in Gaza, and as inflationary pressures have been easing.

Citing a moderate inflation environment and a recovery in economic activity, the central bank lowered interest rates by 25 basis points to 4.25% from 4.5%. The Bank of Israel last reduced the key lending rate in January 2024 to support households and businesses as the economy was getting battered by the war with Hamas in Gaza, triggered by the October 7, 2023, onslaught.

“With the stability of the economy, the somewhat stabilizing geopolitical situation, and with Israel’s risk premium declining substantially after the 12 days of war with Iran in June, we saw the opportunity to lower interest rates, which is consistent with keeping inflation within the center of our target and maintaining financial stability,” Dr. Adi Brender, head of the Bank of Israel’s research department, told The Times of Israel in a phone interview.

“Looking ahead, the geopolitical environment is unstable, although currently there seems to be somewhat more mitigated fighting on all fronts, but still, the risks are there,” Brender cautioned. “We take a very cautious approach about the interest rate path looking forward, which will depend a lot on the developments, both on the geopolitical front and on the fiscal front.”

According to the Bank of Israel’s current macroeconomic forecast, the interest rate is expected to fall by a cumulative 0.5% to 3.75% by September 2026, assuming a stable geopolitical environment and sound fiscal situation.

“It’s important for people to realize that we are not likely to embark on a path that goes back to those very low close to zero interest rates that we saw in the pre-COVID period,” Brender said.

Monday’s decision was taken by the central bank’s........

© The Times of Israel