Macroeconomic and geopolitical developments – Weekly report, January 6, 2026
The year ends on a calmer note, with Israel’s macro-economic environment improving. Still, it is constrained by tight labor markets, and fiscal uncertainty exists. Domestic demand indicators point to solid fourth-quarter momentum, the shekel remains firm, and risk premia have continued to decline. This kind of environment keeps alive the policy debate on how quickly interest rates can normalize without reigniting inflation.
From a geopolitical perspective, Prime Minister Netanyahu’s recent visit to the United States showed strategic alignment between Israel and the U.S. In particular, the discussions emphasized progress toward the second phase (Phase B) of the ceasefire, while maintaining Hamas disarmament as a prerequisite and adopting firm rhetoric toward Iran. That being said, as is often the case, the key differences lie in the details: President Trump appears keen to advance Phase B relatively quickly to signal momentum, whereas Netanyahu has shown greater caution, driven by both security considerations and domestic political constraints.
On the domestic political front, uncertainty remains elevated. The conscription law faces broad public opposition and resistance within the Knesset, making its passage increasingly unlikely. This has raised the probability of early elections in the coming months, potentially as soon as late spring.
Inflation continued to ease toward year-end, supported by a sharp decline in fuel prices, a strong shekel, and easing housing prices. December’s CPI is expected to be close to zero, and prices are also expected to decline in January following a 3.66% drop in fuel prices. As a result, annual inflation is projected to fall to 1.7%-1.8%, a level not seen in several years.
At the same time, inflation expectations have remained firmly anchored for several months in the 1.6%-2.0% range, both in market-based measures and in forecasters’ estimates. Against this backdrop, The Bank of Israel delivered a second consecutive rate cut, reflecting a more dovish policy stance. Looking ahead, we expect a temporary pause in rate cuts in the coming months, followed by a gradual easing cycle later in 2026, with the policy rate converging toward 3.5% by mid-year.
Beyond the interest-rate decision, several key domestic data releases are scheduled for this week. On January 6, Israel’s Central Bureau of Statistics is set to publish the December 2025 Business Tendency Survey, which will provide updated insights into firms’ assessments of activity, demand, and expectations heading into early 2026. In addition, retail chains’ revenue data for November will be released, offering another high-frequency indicator of private consumption momentum toward year-end.
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