Macroeconomic and geopolitical developments – Weekly report, January 26, 2026
This week’s update is dominated by geopolitical uncertainty, with rising tensions surrounding Iran. At this stage, a U.S. military strike is not a certain outcome, and developments could still evolve toward increased diplomatic pressure or a negotiated arrangement. Nevertheless, the risk of escalation remains high and could carry economic and fiscal implications for Israel.
At the same time, domestic political uncertainty has increased. The first-reading vote on Israel’s 2026 state budget was postponed to Wednesday following demands by ultra-Orthodox parties to advance discussions on the draft-exemption law. While the budget is still expected to pass the first reading, uncertainty has risen regarding its approval in the second and third readings, reflecting higher political risk around the budget process.
On the macro front, fiscal data surprised on the upside, with the increase in the debt-to-GDP ratio in 2025 to 68.5% coming in below earlier expectations, supported by stronger-than-anticipated tax revenue performance. Activity indicators toward year-end point to improving economic momentum, as reflected in industrial production and VAT-based revenue indices, albeit with elevated volatility, partly driven by defense-related output.
Labor market conditions remain tight, supporting wage pressures. At the same time, inflation expectations have continued to ease and are now below the midpoint of the target range at the short end, while remaining well anchored over longer horizons. Despite this, the Bank of Israel is unlikely to cut interest rates at the February or March meetings, given labor market tightness. That said, we continue to expect additional easing later this year, with two further rate cuts bringing the policy rate down to around 3.5% by year-end.
Now read on...
Register to sample a report