Macroeconomic and geopolitical developments – Weekly report, January 12, 2026
The past week was marked by the Bank of Israel’s rate cut and the market’s reaction to this somewhat unexpected move. This came alongside heightened geopolitical developments, most notably the expanding protests in Iran. While the latter do not yet have a direct impact on Israel’s macro outlook, they remain important for risk pricing and Israel’s geopolitical risk premium. At the same time, diplomatic efforts related to Gaza continued to advance, with reports pointing to a possible U.S.-led international framework for stabilization and reconstruction, and efforts continued in domestic politics to advance the conscription law in an attempt to avoid early elections.
Domestically, economic indicators continue to point to expansion toward year-end, albeit at a more moderate pace after the rapid post-war rebound. Business surveys signal ongoing growth in activity and employment, with the high-tech services sector particularly optimistic, especially on exports. Consumer data suggest some cooling in private consumption late in the fourth quarter, but overall household demand remains resilient, and the labor market remains tight.
Financial markets reacted positively to the Bank of Israel’s surprise rate cut, which we view as consistent with moderating inflation and expectations for inflation to fall below 2% in early 2026. Equity markets rose, government bond yields declined, and Israel completed a large international bond issuance at significantly tighter spreads than in 2024, reflecting a meaningful decline in Israel’s risk premium. Looking ahead, a heavy data calendar led by the December CPI and full-year trade data will shape expectations for inflation, growth, and the pace of further monetary easing. The release of final budget execution data for December is also expected, likely showing the year closing with a deficit below 5% of GDP.
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