Israel Cuts Interest Rates Amid Progress in US-Iran Interim Agreement Talks

Israel's Central Bank Cuts Interest Rate by 25 Basis Points

In a move that signals stabilizing inflation, a stronger shekel, and signs of a potential deal between the US and Iran, the Bank of Israel reduced its base rate by 25 basis points to 3.75% on Monday. This decision aligns with the median projection of 14 economists surveyed by Bloomberg.

The Bank of Israel's move comes after two consecutive meetings where policymakers left borrowing costs unchanged due to concerns about inflation and growth in the wake of US-Israeli strikes on Iran in late February, which had triggered a war. Despite these risks, the central bank's forward guidance remains unchanged, stating that interest rates will be determined based on inflation developments, economic activity, geopolitical uncertainty, and fiscal developments.

Meanwhile, the US and Iran are making progress towards a deal to extend the ceasefire agreed on April 8 and reopen the Strait of Hormuz. However, officials from both sides have indicated that certain points still require negotiation before an announcement is made.

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The Israeli shekel has strengthened significantly, trading at around 2.9 against the dollar, its strongest position in over three decades. This development has solidified expectations of moderate inflation. Interestingly, Israel's average inflation forecast for the next 12 months has fallen to 1.8% from a previous 2.3%, according to a Bank of Israel survey published on May 19.