Inflation Within Target but Pressures Persist

August’s Consumer Price Index rose by 0.7%, a relatively high monthly gain, but on an annual basis inflation slowed to 2.9%, entering the official 1%–3% target range for the first time in months. This decline provides some relief, though policymakers remain cautious. Rising costs, particularly a sharp increase in holiday-season airfare, could push inflation back above the 3% threshold, complicating the case for a rate cut.

Currency Stability and Global Policy Signals

The shekel has remained relatively stable against the dollar and the euro, easing import costs and dampening inflationary pressures. At the same time, the Federal Reserve began a new cycle of rate reductions in September, signaling a global trend toward looser monetary policy. Since January 2024, Israel has kept its rate unchanged, making it an outlier among developed economies that have already taken further steps to support growth.

Fiscal Pressures and Security Costs

The primary argument against an immediate cut lies in the sharp rise in defense expenditures since the launch of Operation “Gideon Chariots II.” Estimates suggest tens of billions of shekels in additional spending by year-end, which has already pushed the deficit to 5.2%. Under such conditions, monetary easing could clash with fiscal realities and risk undermining economic stability.

Market and Banking Sector Adjustments

The financial system has already begun preparing for potential cuts. Deposit rates in local banks dropped from 3.5%–4% to around 3%, and mortgage rates have also edged lower. These moves reflect market expectations that the Bank of Israel will eventually be forced to ease policy, given the slowdown in real estate transactions and the need to stimulate economic activity.

Looking Ahead

Governor Amir Yaron is expected to accompany tomorrow’s decision with warnings about deteriorating economic conditions, including international boycotts, and to criticize the government for failing to advance the 2025 budget. With no appointed head of the Budget Department and no discussion yet on the 2026 plan, fiscal uncertainty remains high. The upcoming decision will serve as a key indicator of how Israel intends to balance inflation control, fiscal challenges, and geopolitical risks in the months ahead.