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The Israeli shekel strengthened to around $2.88, its highest level since 1993, following a sharp 20% appreciation over the past year. In May, the Bank of Israel cut its benchmark interest rate by 25 basis points to 3.75%, in line with market expectations. The central bank cited stabilising inflation, the stronger shekel, and indications that Washington and Tehran are moving closer to extending their ceasefire and reopening the Strait of Hormuz as key reasons for the decision.
The rate cut was further supported by an improvement in public finances: the 12-month rolling fiscal deficit narrowed to 3.8% of gross domestic product in April. According to a Bank of Israel survey published on May 19, average inflation expectations for the next 12 months declined to 1.8% from 2.3%, moving below the midpoint of the government’s 1–3% target range (1.9%).
Against this backdrop, policymakers are now expected to deliver one or two additional rate cuts before the end of the year, as the economy continues its gradual recovery from the recent conflict with Iran.
