Macroeconomic and geopolitical developments – Weekly report, February 9, 2026
Israel’s political arena remains highly turbulent, centered on three interlinked fronts: the 2026 state budget, which must be approved by March 31; the military conscription legislation, which remains stalled at the level of legal advisers; and, more recently, Prime Minister Netanyahu’s publication of partial protocols as part of the political and legal struggle over responsibility for the events of October 7. Meanwhile, the 2026 budget is facing a significant delay, both in the pace of discussions within the Knesset and in its transfer to the relevant parliamentary committees.
At face value, these developments raise the risk of early elections. However, our baseline assessment remains that the current impasse reflects political pressure and tactical maneuvering rather than a deliberate move toward elections. Polling dynamics and strong incentives for budget approval across coalition partners continue to point toward the eventual passage of the 2026 budget, preserving fiscal continuity. That said, late-cycle political risks have increased and remain a key source of uncertainty.
On the monetary front, attention is turning to the release of the January CPI on February 15, followed shortly by the Bank of Israel’s interest-rate decision on February 23. The key question for markets is whether the central bank could deliver a third consecutive rate cut, after lowering the policy rate twice, from 4.5% to 4.0%, in December and January. At face value, macroeconomic conditions increasingly support further easing. However, despite supportive conditions, the balance of risks still argues for caution. As a result, while the case for further easing is strengthening, our baseline scenario remains that the Bank of Israel will pause in February and preserve policy optionality, with additional rate cuts more likely later in the year, once disinflation proves durable.
The shekel has appreciated sharply since late 2024, driven primarily by large FX sales by institutional investors, renewed non-resident inflows, and structurally strong high-tech exports. While appreciation pressures are expected to moderate, the central scenario is stabilization rather than reversal, with the strong currency continuing to exert disinflationary pressure via lower import prices.
Turning to real activity, recent indicators point to an ongoing but maturing recovery. Industry, services, and high-tech exports remain the main growth engines, while business surveys suggest expansionary conditions with softer forward momentum. Tourism continues to recover gradually but remains well below its pre-war level, while record outbound tourism continues to weigh on domestic consumption.
Data releases to watch
Throughout the week, the macro focus will shift decisively toward hard data that should help clarify the underlying pace of activity and the policy outlook, including consumer sentiment, retail-chain sales for December, housing transaction data, and foreign trade figures. Early next week, attention will turn to the release of national accounts data for Q4 and full-year 2025 (Monday, February 16), alongside the January CPI (Sunday, February 15). Together, these data will allow a first comprehensive assessment of how the economy ended 2025 and entered 2026 and will play a central role in shaping monetary policy over the coming quarters.
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