Macroeconomic and geopolitical developments – Weekly report, November 25, 2025
More than a month after the Gaza ceasefire, Israel’s strategic environment remains unstable. Military gains in Gaza, Lebanon, and Iran have not translated into durable political arrangements. In Lebanon, Hezbollah's rearming and tensions have intensified following recent Israeli strikes. In Gaza, the U.S.-backed stabilization plan faces major implementation problems, with Washington prepared to maintain a long-term division between a “red zone” under Hamas control in the western part of the Strip and a “green zone” in the east, under Israeli control, where reconstruction is expected to begin. Iran is restoring its missile capabilities, while shifting U.S.-Saudi priorities limit Israel’s diplomatic leverage ahead of the elections.
From an economic perspective, we see a rapid rebound in Q3 growth, alongside strong wage data (showing nearly 5% annual increases), improving consumer sentiment, and a persistently tight labor market. At the same time, inflation has fallen for the second consecutive month, allowing the Bank of Israel to cut rates to 4.25%, its first reduction since January 2024. We expect another 25 bp rate cut at the February MPC meeting, followed by an additional cut in Q2 2026, bringing the policy rate to roughly 3.5%-3.75% by year-end.
In the FX market, the shekel has stabilized and slightly appreciated to around 3.28 per dollar. The shekel has gained from record high-tech services exports in September, as well as widening interest-rate differentials working in Israel’s favor.
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