Israel Cuts Rates by a Quarter Point, Triggering Calls for More

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(Bloomberg) — Israel resumed interest rate cuts on Monday, but was met with unusual backlash by Israeli exporters, who want the central bank to do more to counter the shekel’s appreciation.

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Tech companies in particular have complained that they’re struggling to cope with a persistently strong currency. Trading around 2.9 against the dollar, the shekel is at its strongest position in over three decades.

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The Bank of Israel lowered its base rate by 25 basis points to 3.75%, in line with the median projection of 14 economists in a Bloomberg survey. Policymakers left borrowing costs unchanged in the two previous meetings due to risks to inflation and growth from the Iran war, triggered by US-Israeli strikes on the Islamic Republic in late February.

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“It’s a conscious decision to sacrifice industry and high-tech,” the Manufacturers Association of Israel, a lobbying group representing hundreds of exporters and other companies, said in a statement following the decision. “Israel has become an island of high interest rates in a global environment of falling rates.”

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It said the central bank had failed to grasp the severity of the situation facing Israeli exports and industry, calling for borrowing costs to be further lowered. “Real interest-rate differentials are attracting heavy inflows of foreign capital, bringing additional dollars into the local market and intensifying the damaging appreciation of the shekel.” 

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Israeli Finance Minister Bezalel Smotrich — who has repeatedly called for the Bank of Israel to cut rates — called the decision “too little, too late,” according to a social media post.

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Policymakers left forward guidance unchanged, signaling the path ahead is unlikely to change materially. The central bank said rates will be determined “in accordance with inflation developments, economic activity, geopolitical uncertainty, and fiscal developments.”

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Israel’s average inflation forecast for next 12 months fell to 1.8% from a previous 2.3%, according to Bank of Israel survey published on May 19.

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The bank’s monetary committee said there are risks of a renewed acceleration in inflation, including geopolitical developments and their impact on economic activity and energy prices, increased demand alongside supply constraints, and fiscal developments. The appreciation of the shekel, on the other hand, may act to moderate inflation, it said in a statement. 

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The US and Iran are inching closer to a deal to extend the ceasefire agreed on April 8 and reopen the Strait of Hormuz. But officials on both sides have signaled that certain points still need to be negotiated before an announcement is made.

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“It is evident that local and global uncertainty continues to warrant caution, acting as a barrier to more pronounced policy moves,” said Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank. “The Bank of Israel views the shekel’s appreciation merely as a mitigating factor against other risks that could trigger a resurgence of inflation.”

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—With assistance from Alisa Odenheimer.

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(Adds exporters’ reaction, details starting in the first paragraph.)

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