Past week review and week ahead: March CPI, budget, and geopolitics in focus - Weekly report, April 13, 2026
After nearly two weeks of holiday-related slowdown, economic activity in Israel resumed yesterday, alongside a continued ceasefire and a gradual return to routine. Equity markets responded positively to the cease-fire, with the TA-35 rising by 1.9% and the TA-90 gaining 1.6% in Friday’s session. Over the past week, both indices posted strong gains of 10.5% and 8.0%, respectively, and since the beginning of the war they have been up by 7.6% and 1.8%. These data suggest that the Tel Aviv Stock Exchange views the ceasefire as positive, which is driving the gains.
That said, the situation remains fluid. Talks between Iran and the U.S. broke down on Saturday, and in response the U.S. imposed a naval blockade on the Strait of Hormuz. It remains unclear whether the ceasefire will hold, while fighting in Lebanon continues, including missile and rocket fire toward northern Israel.
From a broader perspective, the emerging principles of the negotiations may be problematic from Israel’s point of view, particularly if no clear agreement is reached on Iran’s nuclear program. Meanwhile, Iran appears to be strengthening its position, leveraging its control over the Strait of Hormuz. On the other hand, Iran’s military capabilities were significantly weakened during the war, and rebuilding them is likely to take years. In any case, Israel is expected to wait and assess the outcome of the negotiations before adjusting its strategy.
On the macro side, attention will shift this week back to data, with the March CPI due on Wednesday. We expect a 0.5% increase, keeping annual inflation around 2%, at the midpoint of the target. However, the reading will be affected by the war (the war started on February 28), including measurement challenges in components such as airfare and services. More importantly, April is likely to show a sharper increase of 1.1%-1.2%, driven by higher fuel prices and a rebound in flight prices following the reopening of the skies.
From a policy perspective, while inflation remained at the 2% range, where low inflation expectations and the stronger shekel would normally support rate cuts, we believe that the Bank of Israel will remain cautious. The combination of a high fiscal deficit, concerns about pent-up demand after the ceasefire, and a still-elevated risk premium is likely to keep the bank on hold in its coming meetings. In our view, the policy rate will remain at 4.0% for most of 2026, with only a gradual decline toward year-end.
Another issue that remained at the center of public discussion this week relates to the economic cost of the war. The total cost is already estimated at around NIS 65 billion, with military spending accounting for the majority (over NIS 50 billion) and direct civilian costs at around NIS 10 billion, excluding broader macroeconomic effects such as weaker growth, higher inflation, and delayed investment.
In this context, fiscal pressures are expected to intensify. The deficit is likely to rise to around 5.5%-6% of GDP, entailing either spending cuts in civilian budgets or a further increase in borrowing. As a result, the debt-to-GDP ratio is expected to move higher in the near term.
While Israel still benefits from a relatively strong starting position, rating agencies are likely to remain cautious, with risks tilted toward a negative outlook if fiscal deterioration continues (including the risk of another round with Iran). Before the holiday, the Bank of Israel released its Financial Stability Report, which showed that the financial system remains resilient, with banks and institutional investors maintaining strong capital and liquidity positions despite the war in 2025. However, rating agencies are expected to remain cautious in 2026 and closely monitor fiscal and geopolitical developments.
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