Monetary Shift: Israel's Interest Rate Surprise After Gaza Ceasefire

The Bank of Israel cut its interest rate by 25 basis points, citing a better inflation environment post-Gaza ceasefire. Despite two cuts, Governor Amir Yaron emphasized caution in future economic decisions. Factors influencing the decision include easing inflation, a strong shekel, and fewer labour market constraints.

The Bank of Israel made an unexpected announcement on Monday, reducing its interest rate by 25 basis points. This marks the second consecutive cut by the bank, following a similar move in November after almost two years. The decision was attributed to an improving inflation outlook post-Gaza ceasefire.

Governor Amir Yaron expressed that while the two successive cuts might be surprising, the approach remains cautious. He highlighted key contributors to the rate reduction were a strengthening shekel, lower supply constraints, and reduced inflation pressures. The shekel's recent appreciation further supports a lower inflation trajectory.

Despite the cuts, most economists projected a hold in rates for the current month. The central bank forecasts economic growth and has called for legislative approval for the 2026 budget, warning against a high deficit target and political delays that might trigger new elections.

(With inputs from agencies.)