Ahead of Monday's Bank of Israel interest rate decision

ISRAEL - In Brief 02 Jul 2026 by Sani Ziv
Ahead of Monday's interest rate decision The Bank of Israel's Monetary Committee will announce its interest rate decision on Monday. Overall, the balance of factors facing the Bank of Israel supports further monetary easing: Inflation surprised on the downside in May. The CPI declined by 0.3%, while annual inflation has remained at 1.9% for the past four months, below the midpoint of the Bank of Israel's target range. Inflation expectations derived from the capital market have declined to around 1.5%, while private forecasters' inflation expectations, which rose to 2.3% following the war, have eased back to around 1.7%. The 12% appreciation of the shekel over the past three months has reduced imported inflation pressures, while oil prices have fallen back to pre-war levels, supporting a benign inflation outlook over the coming months. Nevertheless, several factors argue for a more cautious policy stance. The housing component of the CPI increased by 3.9% over the past 12 months and accounted for more than half of headline inflation. In addition, as discussed below, the labor market remains tight, and wage growth has accelerated again in May, an important consideration for the Bank of Israel. Finally, the recent shift in the global interest-rate environment, with the ECB raising rates by 25bp and markets increasingly pricing in at least one additional Fed rate hike, has narrowed the room for aggressive monetary easing. Our baseline scenario remains a 25bp rate cut on Monday. However, we continue to view the Bank of Israel as a conservative central bank and therefore cannot rule out the possibility that it will leave rates unchanged.Wage growth accelerated in May Accordi...

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