The Monetary Committee decides on July 6, 2026 to lower the interest rate to 3.5 percent.

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• The memorandum of understanding signed between the United States and Iran led to a decline in energy prices and a moderation of the global geopolitical tension, but the level of uncertainty remains high.
• The inflation rate in May remained stable around the midpoint of the target range, and the risk premium is similar to before October 2023. Overall during the reviewed period, the shekel depreciated with high volatility.
• Current economic indicators point to continued recovery of activity following the sharp decline with the beginning of Operation Roaring Lion (the military confrontation with Iran in March–April).
• The labor market remains tight and the pace of wage increases in March–May was 6.8 percent relative to the same period last year.
• According to the Research Department forecast, GDP is expected to grow by 4 percent in 2026 and by 5.5 percent in 2027. The Research Department’s assessment is that if the defense budget is not increased beyond the buffer reserved in the State budget, the government’s budget deficit is expected to be 4.9 percent of GDP in 2026 and 4.2 percent of GDP in 2027.
• The annual rate of increase in the housing component of the Consumer Price Index rose to an annual rate of 4 percent in May. The annual rate of increase in renewing rental contracts was 2.5 percent, while the annual rate of increase in rental contracts in which there was a change of tenant accelerated to 6.8 percent in the May index.

 

The Monetary Committee’s policy is focusing on price stability, support for economic activity, and stability of the markets.  The interest rate path will be determined in accordance with the development of inflation, economic activity, geopolitical uncertainty, and fiscal developments.

 

 

 

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The memorandum of understanding signed between the United States and Iran lead to a decline in energy prices and a moderation of the global geopolitical tension, but the level of uncertainty remains high. Economic activity continues to recover moderately.  The inflation rate in May remained stable around the midpoint of the target range, and the risk premium is similar to its level before October 7, 2023.  During the reviewed period, the shekel depreciated, with high volatility.

 

The Consumer Price Index declined by 0.3 percent in May, and inflation in the past 12 months remained at 1.9 percent, near the midpoint of the target range (Figure 1).  Net of energy and fruit and vegetables, the annual inflation rate is 1.6 percent (Figure 2). The annual inflation rate of nontradable components was 2.9 percent, and the annual pace of inflation of the tradable components was 0.4 percent (Figure 3). According to forecasters’ assessments, inflation is expected to remain slightly below the midpoint of the target range in the coming months (Figure 5). Inflation expectations for one year forward from the various sources are below the midpoint of the target range (Figure 6).  Expectations for the second year onward are also slightly below the midpoint of the target range (Figure 7).  

 

Since the previous interest rate decision (the representative exchange rate set on May 21, 2026), the shekel has weakened by 3.1 percent against the US dollar and by 1.5 percent against the euro, with volatility during the period after having appreciated markedly at the beginning of the period. In terms of the nominal effective exchange rate the shekel weakened by 2.1 percent.

 

In the Monetary Committee’s assessment, there are several factors that may influence the development of inflation in opposite directions.  The inflation environment is greatly influenced by geopolitical developments and their effects on economic activity and on energy prices, by the risk premium and the exchange rate, by the development of demand alongside supply constraints, and by fiscal developments.

 

The Bank of Israel Research Department revised its macroeconomic forecast. The working assumption underpinning the forecast is that in view of the memorandum of understanding signed between the United States and Iran, there will be no additional fighting with Iran during the forecast horizon. Another assumption on which the forecast is based is that global energy prices, which have fallen due to the agreement, will remain in the current low environment.  In addition, the forecast assumes that the intensity of the fighting in Lebanon will decline in a way that contributes to somewhat easing the supply constraints in the economy.

 

According to the Research Department’s assessment in this scenario, GDP is expected to grow by 4 percent in 2026, compared with 3.8 percent in the March forecast, and by 5.5 percent in 2027, similar to the March forecast (Figure 10).  In the labor market, the broad unemployment rate is expected to be 4.6 percent on average in 2026, mainly due to the sharp increase during Operation Roaring Lion (the military confrontation with Iran in March–April), and to stabilize at 3 percent during the second half of 2026. The inflation rate is expected to be 1.8 percent in 2026 and in 2027.  In the Department’s estimation, if the defense budget is not increased beyond the reserves allocated in the State budget, the government’s budget deficit is expected to be 4.9 percent of GDP in 2026 and 4.2 percent of GDP in 2027.  The debt to GDP ratio is expected to be about 69 percent at the end of 2026 and at the end of 2027.  There is still uncertainty regarding the final size of the defense budget, and a further increase may lead to exceeding the deficit target and an increase in inflation.  There is high uncertainty around the forecast related to geopolitical developments in the region and their impact on the economy.

 

Current indicators of economic activity point to continued recovery following the sharp decline of activity with the beginning of Operation Roaring Lion.  Credit card expenditures in current prices are slightly above the long-term trend line (Figure 12).

 

The aggregate balance in the Central Bureau of Statistics Business Tendency Survey for May increased following the sharp decline due to Operation Roaring Lion, but has not yet returned to its level from before the Operation. (Figure 11).  In the second estimate of National Accounts data for the first quarter (seasonally adjusted in annual terms), which reflects the impact of Operation Roaring Lion on economic activity, GDP was revised downward to minus-3.8 percent.  This decline in GDP is more moderate than previously forecast.  A Research Department analysis indicates that a significant portion of the recent economic growth reflects foreign production by global firms operating in Israel, and that net of the activity of these firms, growth was lower in view of the supply constraints.  As the supply constraints ease, growth will be based on a broader mix of industries and firms in the economy, and GDP will converge toward the long-term trend line.

 

Capital raised in the high-tech sector during the second quarter totaled about $4 billion, similar to the first quarter of the year but lower than the last two quarters of 2025 (Figure 13).  Foreign trade data for May indicate an increase in goods imports and a sharper increase in goods exports, which led to a narrowing of the trade deficit (Figure 20).  Services exports are also high.  In parallel, balance of payments data indicate a relatively high surplus in goods and services in the past two quarters, in view of stability in imports and an increase in exports.

 

The cumulative deficit in the government budget in the past 12 months was 3.8 percent of GDP in May, similar to April, mainly due to the low level of government expenditures in view of the interim budget in the first quarter of the year, which are expected to increase during the rest of the year. Government receipts from direct taxation in May (in fixed prices and net of legislative changes and one-off revenues) remain above the long-term trend (Figure 14). 

 

The labor market remains tight. The rate of absentees due to reserve mobilization declined to 0.5 percent in May. The broad unemployment rate among the prime working ages (25–64) declined to 3 percent in May (Figure 15a). The job vacancy rate increased slightly to 4.2 percent in May, but remains lower than it was prior to Operation Roaring Lion and prior to October 7, 2023 (Figure 16a). Similar to previous months, the employment and participation rates among those aged 15+ declined in May, to 60 percent and 61.6 percent, respectively.  The declines were most prominent among the younger ages.  Among the prime working ages (25–64), the employment and participation rates remained stable in May, at 78.8 percent and 80.9 percent respectively (Figure 15a). Wages are increasing rapidly, reflecting a tight labor market.  Wages increased by 6.8 percent in March–May relative to the same period last year. The increase in wages partly reflects increases in the minimum wage and in public sector wages.  The pace of wage increases in the business sector rose to 6.4 percent in February–April, relative to the same period last year (Figure 17). However, the data are still influenced by changes in the composition of labor due to the effects of Operation Roaring Lion.

 

The level of activity in the construction industry remains relatively high.  According to Central Bureau of Statistics data, in the first quarter of 2026, the annual pace of building starts was about 76,000, building completions continue to increase, and building permits remained stable at a high volume (Figure 19).  The stock of unsold dwellings remains high.  In March–April, home prices declined by 0.3 percent, and in annual terms they declined by 1.3 percent (Figure 8). In May, mortgage borrowing totaled about NIS 9.5 billion in seasonally adjusted terms (Figure 9).

 

The pace of increase in the housing component of the Consumer Price Index rose to an annual rate of 4 percent in the May Index.  The annual rate of increase in renewing rental contracts was 2.5 percent. The annual rate of increase in rental contracts in which there was a change of tenant accelerated to 6.8 percent in the May Index. 

 

Israeli equity indices declined during the reviewed period, underperforming global indices following outperformance in the past two years (Figure 27). Israel’s risk premium, as measured by the CDS spread and by the spreads on dollar-denominated government bonds vis-à-vis US Treasuries, is near its level from before October 7, 2023 (Figures 28a-b).  Business credit continued to expand rapidly during the reviewed period, led by credit from banks. Consumer credit to households continued to expand from all sources.  Payments in arrears in all activity segments remained low. According to the Central Bureau of Statistics Business Tendency Survey for May, credit constraints, both bank and nonbank, declined slightly for most business types and in most industries (Figures 26a-b).

 

The memorandum of understanding signed between the United States and Iran led to a sharp decline in oil prices, alongside a decline in inflation expectations around the world.  During the reviewed period, the price of Brent oil declined by about 30 percent, to around $72 per barrel (Figure 30).  The global Purchasing Managers Index for May remained unchanged at a level indicating continued expansion of global GDP (Figure 32). 

In the US, GDP grew at an annual rate of 2.1 percent in the first quarter.  Despite the weakness in the number of new jobs added in the US employment market in June, the average over recent months has remained high. In the eurozone, first quarter data indicate a slowdown in the growth rate. 

Annual inflation in the US increased sharply in May, with the Consumer Price Index at 4.2 percent and Core CPI at 2.9 percent.  Annual inflation in the eurozone moderated to 2.8 percent in June, with the core index moderating to 2.4 percent.

During the reviewed period, the Federal Reserve left the interest rate unchanged, and the European Central Bank (ECB) increased its rate by 25 basis points—the first increase since September 2023 (Figure 34).  In the US, the interest rate path implies one increase and a 50% probability of a second increase within one year, and in Europe the path implies one rate increase within one year. (Figure 36).

 

The minutes of the monetary discussions prior to this interest rate decision will be published on July 20, 2026. The next decision regarding the interest rate, which was scheduled for August 31, 2026, will now be published on Tuesday, September 1, 2026.  The effective date of the rate from that decision remains unchanged—September 3, 2026.