Fears that weeks of fighting with Hamas will harm an Israeli economy already hurt by a global slowdown led the Bank of Israel to reduce interest rates for a second month in a row on Monday. After a surprise reduction a month ago, the central bank again lowered its benchmark short-term interest rate by a quarter-point to 0.25 percent—an all time low. All 10 economists polled by Reuters had forecast no move. "Karnit joined the war effort," said Ofer Klein, head of economics and research at Harel Insurance and Finance, referring to Bank of Israel Governor Karnit Flug.

Karnit Flug, governor of the Bank of Israel Ariel Jerozolimski | Bloomberg | Getty Images

"It is hard to imagine that without the military operation in the background, the Bank of Israel would choose such an extreme move especially when the United States is already talking about raising interest rates." Israel launched an offensive against Hamas fighters in Gaza on July 8 after cross-border rocket strikes by militants intensified. Thousands of rockets have been fired into Israel, putting consumers off shopping, damaging tourism and curtailing manufacturing activity—particularly in southern plants near Gaza. "We're not in a recession but we are definitely in a slowdown in activity," central bank chief Flug told Israel Radio following the rate cut. Read MoreDangers of Fed's way-too-low rates: Reagan adviser "We saw this [slowing] in the quarter before the fighting... mainly because of the situation in the global economy, the reduced demands in our main markets and joining this trend now is an additional slowdown as a result of the effects of the fighting," she added. The central bank has estimated the conflict will knock half a point off economic growth. "That's not negligible, and of course businesses in the south [where most Gaza rockets are targeted] feel it much more strongly,'' Flug said. The bank previously forecast an expansion of 2.9 percent this year but it will publish an updated estimate next month.