Finance Minister Bezalel Smotrich criticized the Bank of Israel's modest interest rate cut on Monday evening through a social media post. He described the 0.25% reduction to 3.5% as insufficient for the economy's needs and disclosed his push for a steeper decrease. Smotrich argued that a bolder move would better relieve the cost of living while aiding high-tech and export industries.

Despite the public push from political leaders, the Bank of Israel's Monetary Committee maintained a cautious approach and approved only the 0.25% cut to 3.5%. This marks the second straight reduction and the third this year, indicating a shift toward supporting economic recovery.

Such direct political pressure from the finance minister risks consequences in global markets. Central bank independence remains a key strength for Israel according to international rating agencies. Interference in rate decisions could be viewed as an institutional weakness and trigger a credit rating downgrade.

A downgrade would raise government borrowing costs and deter foreign investors at a time when the economy shows early recovery signs after over two years of conflict. The Bank of Israel Research Department has raised its 2026 growth forecast to 4%.

The central bank cited the need to avoid reigniting inflation as the reason for rejecting a sharper cut. Although a US-Iran understanding caused oil prices to fall about 30% and eased risk premiums, domestic pressures persist. Unemployment stands at 3%, wages rose 6.8% in March-May, the shekel fell 3.1% versus the dollar, and housing costs jumped 6.8% in tenant-change contracts. Economists warned that an aggressive cut could undermine price stability.

News for mortgage takers

The rate decision offers immediate benefits for borrowers. The cut flows directly to the prime rate. For an average couple with a NIS 1,000,000 mortgage where the prime portion is roughly one-third (about NIS 330,000) over 25 years, the 0.25% reduction should save NIS 50-60 per month.

With this being the third cut since January, the same couple has seen cumulative monthly savings of NIS 150-180. The change also lowers costs for other loans and overdrafts, boosting disposable income and supporting consumption.

Over time, cheaper mortgages and lower business financing costs should add liquidity to the housing market. Reduced credit expenses may draw buyers back and slow the drop in apartment prices, though this could complicate entry for first-time purchasers. Lower capitalization rates lift company valuations on the stock exchange and expand credit access, yet they reduce appeal for savers seeking deposit alternatives.