Weekly report, June 8, 2026: Bank of Israel signals faster rate cuts, shekel reverses course, elections likely in October, Iran-Israel tensions escalate again
Key developments and outlook:
- The war between Iran and Israel resumed following an Iranian attack on northern Israel and an Israeli response targeting sites in Iran. The United States is attempting to contain the conflict in order to preserve momentum in the negotiations with Iran.
- Israeli financial markets were mixed, with the TA-35 ending slightly higher while the TA-90 extended last week's decline. At the same time, the shekel weakened by 1.2% against the dollar.
- The weakening of the shekel follows a trend reversal that began last week after Governor Yaron signaled faster rate cuts and the Bank of Israel purchased approximately $800 million in foreign exchange during May.
- However, the structural forces behind the shekel's appreciation remain firmly in place. High-tech services exports reached a new record high in March, while startup fundraising remained strong.
- Wage growth moderated sharply in April as the ceasefire eased labor-market pressures and reduced concerns about labor shortages.
- Recent activity indicators suggest that the economy is recovering from the war with Iran, but the pace of normalization remains slower than after previous military operations.
- The combination of a stronger shekel, easing wage pressures, weaker domestic demand, and lower fuel prices strengthens the case for additional Bank of Israel rate cuts, potentially as early as July 6.
- The Ministry of Finance raised its 2026 GDP growth forecast to 4.0% and expects growth of 4.7% in 2027. We remain more cautious for 2026, projecting growth of 3.3%, reflecting ongoing labor shortages and other supply-side constraints. The OECD shares our 2026 forecast of 3.3% but expects a stronger rebound in 2027, with GDP growth reaching 5.6%.
- The Ministry of Finance raised its 2026 tax-revenue forecast by NIS 7 billion despite the war, reflecting stronger-than-expected tax collection during the first four months of the year and the continued resilience of Israel's high-tech sector.
- Israel and Lebanon reached preliminary understandings aimed at strengthening the ceasefire, but Hezbollah rejected the proposed arrangement, suggesting that tensions along the northern border are likely to remain high.
- Coalition parties appear to be moving toward an agreement for elections on October 20, in exchange for advancing legislation sought by the ultra-Orthodox parties. The passage of these laws may prove politically costly for Likud.
- According to recent polling, Likud, led by Benjamin Netanyahu, remains the largest party. However, opposition parties continue to retain a majority at the bloc level. Gadi Eisenkot, a former IDF Chief of Staff, continues to gain political momentum.
Important macroeconomic releases this week:
- Several important economic indicators are scheduled for release this week and will provide additional insight into the pace of the economic recovery following the war with Iran.
- On Tuesday, the CBS is expected to publish data on retail-chain sales for April 2026, providing another indication of private-consumption trends at the start of the second quarter. The data will help assess whether the recovery seen in credit-card purchases was broad-based or limited to specific categories of spending.
- On Wednesday, the CBS will release the Consumer Confidence Index. Despite the ceasefire, consumer confidence remained relatively weak in April, reflecting ongoing geopolitical uncertainty and concerns about the economic outlook. The upcoming release will show whether confidence improved further in May as financial markets stabilized and the security situation eased.
- On Thursday, the CBS is expected to publish foreign-trade price indices and Israel's terms of trade for the first quarter of 2026. The data will provide additional information on import and export prices and help assess the impact of the strong shekel on Israel's external sector.
- In addition, on Monday, June 8, the Bank of Israel will publish the minutes of its latest monetary-policy meeting. Investors will closely examine the discussion for further clues regarding the likelihood and timing of additional rate cuts, particularly following Governor Yaron's recent remarks suggesting that faster monetary easing could be considered if inflation continues to moderate.
Now read on...
Register to sample a report