Bank of Israel Governor: "Only one interest rate cut expected in the next nine months"

The third consecutive interest rate cut by the Bank of Israel to 3.25% (with a prime rate of 4.7%) has drawn significant attention. Bank Governor Professor Amir Yaron explained the rationale behind the monetary committee's decision.

"It is worth emphasizing that inflation is currently below the center of the target range at 1.5%. We are aware that it is expected to rise in the coming months, including due to fuel price increases, and we have certainly taken this into account," the Governor stated. "Despite this, we believe that inflation will remain around the 2% target range during the coming year. Other factors allowing for this reduction include economic activity levels and a strong shekel."

When asked if a third consecutive cut might fuel inflation, Yaron replied: "We must always manage risks. We knew how to keep the interest rate high when necessary, and now we are loosening our stance, considering the strong shekel and Brent crude price fluctuations."

Regarding potential political pressure from the Prime Minister or Finance Minister, the Governor was unequivocal: "The answer is a definitive no. We have a very professional monetary committee, and the walls of the committee room are very thick."

Addressing fiscal uncertainty and the upcoming state budget, Yaron noted: "We will only know the budget parameters after the next government is formed, not before early 2027. Under all reasonable scenarios, we will remain within the target inflation range, but the next government's fiscal policy will be crucial."

Comparing Israel's situation to global markets where rates are rising, Yaron highlighted the success of local monetary policy: "During the war, we were criticized for keeping rates high, but we acted correctly. This allows us now, while other countries are forced to raise rates, to lower ours, partly thanks to our natural gas resources."

On the demand for a record defense budget, Yaron urged caution: "Security is vital, but we must avoid future commitments. If the defense budget increases significantly, it will lead to higher taxes, higher interest rates, or more inflation. The defense establishment must manage resources more efficiently. It is appropriate to limit spending to immediate needs to allow the new government policy flexibility."

Regarding future forecasts, Yaron stated: "We expect the interest rate to reach 3% in nine months. As we continue these cuts, we are approaching a neutral interest rate level."

Finally, assessing the real estate sector, the Governor added: "Transaction volume has risen but remains moderate. I would like to see contractors continue to lower prices. We see active construction and no arrears in mortgage payments, but we will continue to monitor the situation closely."