Macroeconomic and geopolitical developments - Weekly report, February 27, 2026

ISRAEL - Report 27 Feb 2026 by Sani Ziv

This week’s data pointed to a gradually moderating economy, with softer momentum toward the end of 2025, particularly in high-tech and industry. Revenue and industrial data show some deceleration, while the Bank of Israel’s activity index still signals expansion at the start of 2026. Meanwhile, the labor market remains tight, with low unemployment and rising participation.

At the beginning of the week, the Bank of Israel left the policy rate unchanged at 4.0%, signaling a slightly more hawkish tone. Despite moderating inflation, the bank’s Monetary Committee chose to pause after two consecutive cuts, reflecting a gradual approach against a tight labor market and geopolitical risk of war with Iran.

Financial markets reacted negatively to the interest rate decision. The TA-35 index declined by 2.5% over the week, while long-term government bond yields edged higher. The shekel remained broadly stable around 3.12 per dollar. Market developments reflected not only the rate decision itself but also renewed Iran-related risks and increased volatility on Wall Street.

Geopolitical tensions remain high, with the Iran file at the center. The third round of U.S.-Iran talks was described as serious, with another round scheduled next week in Vienna. While the U.S. continues to prioritize diplomacy, it may ultimately face pressure to act if negotiations fail. At this stage, markets seem to be pricing any potential U.S. action as limited rather than a broad regional war.

In Gaza, reconstruction efforts are moving slowly into an initial implementation phase, including a pilot neighborhood in Rafah and the possible deployment of a multinational force. However, there is still no concrete framework or timetable for Hamas’s disarmament.

The week ahead: Next week will feature key domestic data releases alongside continued geopolitical focus. Services exports (December), credit-card purchases (November-January), and the average wage for December will provide signals on external demand, private consumption, and wage pressures. Tourism data for February and the government’s March bond issuance plan will also be in focus. At the same time, tensions with Iran are likely to remain central to market sentiment and regional risk premia.

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