The Bank of Israel resumed monetary easing on Monday with a quarter-point interest rate cut, signaling growing confidence that inflation remains under control even as policymakers continue navigating the economic uncertainty created by the ongoing regional conflict with Iran.

The central bank lowered its benchmark short-term interest rate to 3.75% from 4%, marking the first reduction since January after pausing earlier this year amid concerns that war-related disruptions could reignite inflationary pressures.

While the move was widely expected by financial markets, officials emphasized that future easing will likely proceed cautiously given the fragile geopolitical backdrop and ongoing uncertainty surrounding the ceasefire between Israel and Iran.

Stable Inflation and Strong Shekel Support Rate Cut

The Bank of Israel pointed primarily to moderating inflation and significant currency strength as the main factors allowing policymakers to resume lowering borrowing costs.

Annual inflation remained at 1.9% in April, comfortably within the central bank’s official 1% to 3% target range.

At the same time, the Israeli shekel has appreciated sharply, reaching its strongest level against the U.S. dollar in more than three decades.

Deputy Governor Andrew Abir said the currency’s strength has played a major role in containing imported inflation pressures despite regional instability and higher global energy prices.

“That certainly gives us the room to be able to cut rates — even with the geopolitical uncertainty,” Abir told Reuters.

The shekel strengthened further following the announcement, gaining roughly 0.4% against the dollar, while Tel Aviv equities climbed more than 3% as investors welcomed the central bank’s confidence in economic resilience.

Iran Conflict Continues to Shape Monetary Policy

Despite the improving inflation backdrop, central bank officials stressed that geopolitical risks tied to the Iran war remain a major constraint on how aggressively policymakers can ease financial conditions.

The conflict, which escalated following U.S. and Israeli airstrikes launched in late February, continues to cast uncertainty over regional growth, energy markets, and investor sentiment despite the ceasefire reached in April.

Abir acknowledged that any renewed escalation could negatively impact both economic growth and inflation dynamics.

“A continued war and escalation of it would have an impact both on the real economy and probably on inflation as well,” he said.

Still, the central bank appears increasingly confident that inflation risks are becoming more manageable, particularly given the shekel’s strength and relatively stable domestic labor market conditions.

The Bank of Israel previously projected two additional rate cuts by early 2027, which would place the policy rate near 3.5%, although officials emphasized that future decisions will remain heavily dependent on incoming economic and geopolitical data.

Pressure Builds for Faster Monetary Easing

The latest move has not fully satisfied Israeli business leaders and government officials, many of whom argue the economy requires more aggressive monetary support.

Exporters have increasingly pressured policymakers to weaken the shekel or accelerate rate cuts as the strong currency reduces international competitiveness for Israeli manufacturers and technology companies.

Finance Minister Bezalel Smotrich criticized the central bank’s decision as “too little, too late,” arguing that larger reductions are needed to support businesses, households, and exporters facing elevated borrowing costs and slowing global demand.

Manufacturing groups also expressed disappointment, warning that tighter financial conditions combined with geopolitical uncertainty may eventually weigh on economic growth.

Nevertheless, the Bank of Israel continues prioritizing financial stability and inflation credibility after successfully lowering inflation without triggering significant labor market deterioration.

Looking ahead, investors will likely remain focused on inflation trends, currency movements, and developments surrounding the Iran conflict, all of which are expected to heavily influence the pace and scale of future monetary easing decisions in Israel.