Weekly report, July 20, 2026: June CPI eases to 1.6%; geopolitical risks rise; legislative blitz ahead of October elections
Key headlines:
* The collapse of the U.S.-Iran ceasefire has increased the risk of a broader regional conflict. While our base case remains that the fighting will be contained, the risk of Israeli involvement has increased. Such a scenario would likely require additional defense spending, widen the fiscal deficit, slow economic growth and raise Israel's geopolitical risk premium.
* Israel has officially entered election season. The coalition pushed through a legislative blitz aimed primarily at strengthening its alliance with the ultra-Orthodox parties ahead of the October elections, reinforcing political and institutional uncertainty.
* Inflation continues to moderate. The June CPI was unchanged, lowering annual inflation to 1.6%, its lowest rate in five years. We continue to expect inflation to remain around current levels through year-end.
* The Bank of Israel has room for one additional rate cut, but not for an aggressive easing cycle. We continue to expect one 25bp cut in October, bringing the policy rate to 3.25% by year-end.
* Economic activity rebounded in the second quarter. Business surveys, credit card spending, foreign trade and the Bank of Israel's Composite Index all point to a recovery following the March-April disruption.
* The labor market remains exceptionally tight. Job vacancies rose to 145.6k in June and wage growth accelerated to 6.7% y/y, supporting domestic demand while limiting the scope for monetary easing.
* Foreign trade data also support the recovery story. Both exports and imports increased sharply in June, reflecting resilient external demand and stronger domestic activity.
* Overall, domestic macro fundamentals have improved, but financial markets are likely to remain driven primarily by geopolitical and political developments in the months ahead.
Now read on...
Register to sample a report