Bank of Israel resumes rate cuts as inflation stable despite war

JERUSALEM, May 25 (Reuters) - The Bank of Israel lowered short-term interest rates for the third time in six months on Monday, citing a large appreciation of the shekel and stable inflation, while cautioning that geopolitical uncertainty remains high. The central bank, as expected, reduced its benchmark rate to 3.75% from 4%. It had cut in November and January but paused in its two subsequent decisions due to the conflict with Iran and fears of a spike in supply-driven inflation. The annual inflation rate held at 1.9% in April, well within a 1-3% target but policymakers remained concerned about a renewed acceleration of price pressures due to geopolitical developments and their impact on economic activity, energy prices and higher state spending.

The shekel, which stands at a 33-year peak against the dollar, may be working to moderate inflation, the central bank said. Exporters have called on the central bank to lower rates or intervene in the foreign exchange market.

The U.S. and Israel launched airstrikes on Iran on February 28. A ceasefire forged on April 8 has held but remains fragile. "There is still significant geopolitical uncertainty, both domestically and globally," the Bank of Israel said in a statement. The Iran war "had an impact on real economic activity, and the most recent data show a recovery."

The Bank of Israel's staff in March had forecast two rate cuts ?by ?early 2027, or a policy rate of 3.5%.

"The Monetary Committee's policy is focusing on price stability, support for economic activity, and stability of the markets," it said. "The interest rate path will be determined in accordance with the development of inflation, economic activity, geopolitical uncertainty, and fiscal developments." (Reporting by Steven Scheer; Editing by Toby Chopra)