Weekly Report - October 5, 2026: Fuel-tax cut lowers near-term inflation; BoI set to pause; Israeli bonds outperform; election race remains tight
Israel returned from the holiday period with financial markets and the economic data calendar moving back toward normal activity. The main macro development during the holiday period was the Finance Minister's decision to largely offset the latest increase in gasoline prices through an additional temporary excise-tax cut, leading us to lower our October CPI forecast to around 0.2%. Underlying inflation remains contained, but the labor market is still tight despite some moderation in wage pressures, supporting our view that the Bank of Israel will keep the policy rate unchanged at 3.25% in its coming meetings. Israeli government bonds have continued to outperform the global sell-off, with the negative 10-year Israel-U.S. yield spread widening further, helped by moderate domestic issuance and favorable local supply-demand conditions.
On the political front, the Supreme Court overturned the disqualification of Ra’am and the Joint List, while the latest Kan 11 poll showed the race between the two main blocs remaining very tight. Eisenkot’s earlier advantage has narrowed, while Netanyahu’s bloc has remained broadly stable around 50-52 seats
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