Bank of Israel rate decision on Monday in focus amid Iran tensions and stronger shekel

ISRAEL - In Brief 22 May 2026 by Sani Ziv

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The Bank of Israel will announce its interest-rate decision on Monday. Financial markets are currently pricing in around a 60% probability of a rate cut. The case for a rate cut is evident and is supported by the relatively moderate inflation environment (1.9% y-o-y, with core inflation at 1.5%), alongside low inflation expectations of around 1.6%. In addition, recent activity indicators, including the CBS Tendency Survey, point to weakening economic activity following the war with Iran in March 2026. The Bank of Israel’s monthly economic activity index for April, published on Wednesday, also showed only a modest increase of 0.2%, indicating a relatively slow recovery from the war. For comparison, following the Twelve-Day War in July 2025, the index increased by 1.5%. We can support this thesis with the April job vacancies data as well, which, although improving compared to March, remain significantly weaker than the levels recorded in February before the war. However, the main argument in favor of a rate cut stems from the sharp appreciation of the shekel. On Thursday, the shekel traded at NIS 2.91 per dollar, reflecting an appreciation of 8.9% since the beginning of the year and around 18% compared to its level a year ago. The stronger shekel is weighing heavily on exports and local manufacturing activity and could support a rate cut in order to encourage capital outflows from Israel. On the other hand, arguments against an immediate rate cut include the high level of geopolitical uncertainty, the possibility of a U.S. attack on Iran, and the inflationary effects of higher oil prices. In addition, although the government deficit declined to just 3.8% of GDP in April,...