Bank of Israel Governor: Inflation at target midpoint; rate cuts likely once or twice, fiscal policy will push debt higher

ISRAEL - In Brief 29 Apr 2026 by Sani Ziv

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The Governor of the Bank of Israel spoke yesterday at a conference held by the Aaron Institute. He stressed the resilience of the Israeli economy during the recent shocks, as reflected in financial indicators, private consumption data (credit-card spending), and tax revenues. The Governor noted that he expects a rebound in activity in April, in line with the patterns observed in previous downturns. On inflation, he emphasized that it has declined to the midpoint of the 1%-3% target range, and that forecasters’ expectations are broadly aligned with those of the bank’s Research Department, at around 2.3%-2.4% over the next 12 months. Regarding monetary policy, the Governor stated that interest rates are expected to be lowered once or twice, likely during 2026, although this remains highly dependent on geopolitical developments. He did not explicitly address the exchange rate but noted that the pass-through from the exchange rate to inflation is around 10%. However, during periods of appreciation, prices are sticky downward and the decline is more limited, reflecting low competition. On the fiscal side, the Governor emphasized the unsustainable path of the deficit and public debt. According to Bank of Israel estimates, even under a scenario where defense spending stabilizes at around 4%-5% of GDP (as per the Nagel Committee), the debt-to-GDP ratio is expected to rise to around 74% by 2035. In alternative scenarios, where defense spending increases further in line with the Prime Minister’s directive (an additional NIS 300 billion over a decade), the ratio could rise to around 81%, and up to 83% if U.S. military aid is also abolished. The Governor did not explicitly address...