Weekly report, July 27, 2026: The risk of another round of fighting with Iran will shape the outlook for inflation, rates and the budget
The past week was dominated by the escalation of the war between the United States and Iran and the increased likelihood that Israel might become directly involved. Financial markets have so far reacted in a measured manner: The shekel depreciated by around 1% against the U.S. dollar, while Israel's 10-year government bond yield rose by around 15-20 basis points as investors priced in higher geopolitical and inflation risks. The TA-35 Index gained about 2.7%, suggesting that investors view the increased pressure on Iran as improving Israel's medium-term strategic position despite the near-term rise in geopolitical risks.
Over the past two days, however, the pace of the war has eased. According to media reports, President Trump continues to view negotiations aimed at reopening the Strait of Hormuz as the preferred option, and no new U.S. strikes on Iran or Iranian attacks against Gulf states have been reported. Nevertheless, the risk of a renewed and broader regional war remains exceptionally high, as military options remain on the table and the outcome of the diplomatic efforts remains highly uncertain.
Against this backdrop, the Bank of Israel published several important reports last week, including the minutes of the July Monetary Committee meeting, the Monetary Policy Report for the first half of 2026, and updated assessments by its Research Department. Together, these publications suggest that, while inflation is increasingly viewed as being under control and economic activity continues to recover, the Committee has become more cautious regarding additional interest-rate cuts. Policymakers repeatedly emphasized that future decisions would depend on geopolitical developments, exchange-rate movements, fiscal policy and inflation.
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