The Bank of Israel said on Monday it had lowered its benchmark interest rate to a record 0.1 percent as a result of inflation and the appreciation of the shekel.
A statement said the decision to reduce the rate by 0.15 percent was taken as a result of several factors, including a 0.9 percent decrease in the consumer price index for January.
The bank said forecasters had projected a 0.6 percent decline in the consumer price index for January.
"The decision to reduce the interest rate for March 2015 by 0.15 percentage points, to 0.10 percent, is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target of 1-3 percent a year over the next twelve months," the statement said.
The measure is also aimed at supporting growth "while maintaining financial stability".
"The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel," it added.
The bank noted that the shekel had appreciated, "strengthening by 2.6 percent against the dollar" between January 25 and February 20 "and by 3.3 percent in terms of the nominal effective exchange rate".
"Continued appreciation is liable to weigh on growth in the tradable industries, exports and import substitutes," it said.
Minutes after the bank's announcement, the shekel's rate against the dollar dropped by 1.16 percent and by 1.47 percent against the euro.
Meanwhile, Israel's Central Bureau of Statistics said on Monday the January unemployment rate slightly improved to 5.6 percent against 5.7 percent in December.
Social-economic issues, namely the cost of living and property prices which have jumped by five percent last year, are key issues in the general election campaign ahead of polling day on March 17.