Inflation expectations remain anchored at the 2% range; activity softens ahead of MPC decision

ISRAEL - In Brief 20 Nov 2025 by Sani Ziv

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The Bank of Israel published its latest update on inflation expectations yesterday, showing that short-term expectations remain low, around the 2% range, close to the midpoint of the Bank’s target. One-year expectations from the capital market averaged 1.9%, while the average 12-month projection of professional forecasters edged down to 2.0% and year-ahead inflation swaps remained near 1.8%.  The annual inflation rate currently stands at 2.5% (October), but looking ahead, we expect annual inflation to fall to 1.9% in January 2026, as the high January 2025 VAT-related CPI reading (0.6%) drops out of the annual calculation.  From the Bank of Israel’s perspective, this backdrop of subdued expectations provides room for a rate cut in November 24 MPC decision point. With one-year inflation expectations around 1.8%-2.0%, the implied real policy rate is high at around 2.5%-2.7% based on the current 4.5% policy rate. This places monetary policy in highly restrictive territory, dampening household demand, credit activity, and investment. Such a high real rate strengthens the case for a rate cut. Long-term expectations were stable at 2.0% for year five and 2.4% for the five-to-ten-year horizon. Yesterday we also received the release of the Bank of Israel’s Monthly Index of Economic Activity. The index was unchanged in October, following a strong 1% rise in September. Because the index reflects activity over the preceding three months, the September reading (covering July–September), captured the sharp rebound after the near-shutdown of the economy in June. By contrast, the October reading (covering August–October) includes weaker data from August and October. The bottom line is ...