Geopolitics remain the main driver, shekel strength deepens; inflation under control - Weekly report, April 21, 2026
Key developments and outlook
- Geopolitics remains the dominant driver: While the recent ceasefires have reduced immediate risks, uncertainty around a potential U.S.-Iran agreement and the fragile ceasefire in Lebanon could lead to another round of fighting in the coming weeks.
- For the medium term: Under the assumption of no decisive outcome on the Iranian and Lebanese fronts, Israel is likely to face continued rounds of fighting with Iran in a multi-front environment, with implications for growth and fiscal spending.
- Real economy hit in March, but likely temporarily: War-related disruptions led to a sharp decline in activity (job vacancies, sentiment, consumption), with an estimated GDP loss of ~0.75% in Q1 (over 10% annualized contraction in Q1). A rebound is expected in Q2, conditional on no renewed round with Iran.
- Fiscal data remain strong but may be misleading: The March 2026 deficit narrowed to 4.2% of GDP, partly driven by one-off revenues (including the Wiz deal). War-related expenditures are not yet fully reflected, as the budget is measured on a cash basis. We expect the deficit to widen to around 5.5%-6.0% of GDP in 2026.
- Inflation remains contained: The March CPI was moderate (1.9% y/y), expectations remain anchored around the midpoint of the target range, and the appreciation of the shekel is easing inflationary pressures.
- Policy to remain on hold: Despite some room for easing, we expect the Bank of Israel to keep rates unchanged at its upcoming May decision, and likely also in July (July 8). We expect the policy rate to remain at 4.0% through most of 2026, with a gradual decline to around 3.75% only toward year-end.
- Shekel appreciation continues: The shekel strengthened to around NIS 3.0 per dollar (and briefly below) in recent days on strong FX inflows, mainly from high-tech dollar revenues, alongside a decline in Israeli investments abroad (and reduced exposure by institutional investors). However, if appreciation persists, the Bank of Israel may intervene and consider measures to moderate it; we assume ~NIS 3.2/$ by year-end.
- Israel celebrates its 78th Independence Day today: Its population reached 10.244 million, including 7.79 million Jews and others (76%), 2.16 million Arabs (21.1%), and 296 thousand foreign residents (2.9%). Over the past year, the population grew by 146 thousand (1.4%), driven by natural increase, modest immigration, and a continued negative net balance of Israelis staying abroad.
- The week will be a short one due to Israel’s Independence Day (The Tel Aviv Stock Exchange will be closed on Tuesday and Wednesday). On Thursday, foreign trade data for March will be released, offering further insight into the external sector.
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