Interest rates, U.S.-Iran negotiations, and markets in focus: macroeconomic and geopolitical developments - Weekly report, March 27, 2026
Headlines:
- Israeli markets weakened sharply this week, driven by growing concerns over a potential agreement with Iran. The sell-off intensified today (Friday), with the TA-90 falling by 2.4% and the TA-125 by 3.5%, bringing weekly declines to 5.9% and 5.2%, respectively, and erasing all gains since the start of the war. The shekel also depreciated (USD/ILS +0.64% today) after a prolonged period of stability, pointing to a shift from relative resilience toward a broader repricing of geopolitical risk across assets.
- The coming week will be shortened due to the Passover holiday, with limited data releases and reduced market activity. The main focus will be on the Bank of Israel policy decision on Monday (March 30), developments in U.S.–Iran negotiations, and the response of financial markets in Israel and New York.
- We expect the rate to remain unchanged at 4.0%. Our reasoning includes higher oil prices, which are expected to push inflation higher in the near term (with April CPI likely to exceed 1%); continued military escalation involving Iran and Lebanon, including the risk of a closure of the Strait of Hormuz; and a still-tight labor market, with wage growth accelerating to 4.6% y/y. Together, these factors eliminate the likelihood of a rate cut at the upcoming decision point. Our baseline remains that rate cuts will be delayed to mid-2026, conditional on an end to the war and inflation stabilizing around 2%.
- The United States and Iran are holding indirect talks over a potential ceasefire agreement. The U.S. has presented a 15-point proposal, but Iran has reportedly rejected most elements, demanding compensation for war-related damages and recognition of its sovereignty over the Strait of Hormuz. Meanwhile, U.S. President Donald Trump has granted an additional 10 days to allow negotiations to continue.
- Meanwhile, the United States is building up additional forces in the region and preparing options to seize Kharg Island, targeting Iranian energy infrastructure and the reopening of the Strait of Hormuz. Such a scenario would likely lead to a sharp increase in oil prices.
- From Israel’s perspective, the key objective is to avoid an agreement that leaves Iran’s nuclear capabilities intact and, if possible, to also place limits on its missile program. These objectives are broadly aligned, in Israel’s assessment, with the interests of Gulf states. At the same time, Israel is expected to align with any U.S. decision on the matter.
- Domestically, the 2026 state budget has passed the Knesset Finance Committee for its second and third readings and is expected to be approved in the plenum. As a result, the likelihood of early elections has declined, with elections now expected to take place as scheduled in October 2026. Prime Minister Benjamin Netanyahu continues to lag in the polls and appears to prefer delaying elections, aiming to buy time.
- Recent data indicate a rapid expansion in economic activity in the months preceding the war, led by the high-tech sector. Business activity (VAT-based index) and industrial production expanded in January-February, with growth concentrated in high-tech and partly reflecting defense-related production. The labor market remains tight, with low unemployment, and wage growth accelerated to 4.6% y/y in January, although underlying momentum remains moderate.
- On the inflation front, higher oil prices are expected to push inflation higher in the near term. March’s CPI is projected to rise by around 0.5%, while April’s could increase by over 1% if energy prices remain elevated and the government does not subsidize fuel prices. One-year market-based inflation expectations remained around 1.5% in February, while expectations among professional forecasters rose to 2.2%, up from 1.9% in January, pointing to growing upside risks.
- Due to the Passover holiday in Israel, most government agencies will close starting Sunday, and no new data releases are expected over the next two weeks. The stock exchange will be closed from Wednesday through the end of the week. Activity is expected to remain limited next week during the intermediate days of the holiday.
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