Weekly report, May 1, 2026: Israeli politics heats up toward elections, while the shekel strengthens despite geopolitical and economic risks
Key developments and outlook:
- Geopolitics: U.S.–Iran negotiations remain stalled, while fighting in Lebanon is gradually intensifying, increasing the likelihood of another round of fighting.
- Politics: Former Prime Minister Naftali Bennett and opposition leader Yair Lapid announced a joint run in the upcoming elections. At this stage, however, the merger does not change the overall political balance, and the system remains in a bloc-level deadlock.
- Economic activity: Data released for March point to a significant decline in economic activity due to the war, although the impact appears to be temporary. Broad unemployment rose, job vacancies declined, business sentiment weakened, and import volumes fell, while consumer confidence declined more moderately. The Bank of Israel activity index fell by 0.2%. Overall, we see a temporary decline in Q1 activity, with output estimated to have fallen by around 10% in annualized terms. A rebound is expected in Q2, conditional on continued stability.
- Exchange rate: The shekel continued to strengthen, trading at 2.95, an 18% appreciation year-over-year. The sharp appreciation is supported by institutional FX hedging (reducing exposure and generating shekel demand), alongside repatriation flows by Israeli investors.
- External sector: Foreign trade data for the first quarter point to a sharp widening in the trade deficit, to an annualized pace of around $46 billion, despite a decline in imports in March due to the war. At this stage, large surpluses in the services account continue to support an overall current-account surplus.
- Our April CPI forecast stands at around 1.1%, driven by a sharp rise in fuel prices (+14.7%), higher airfares, and seasonal factors (clothing, recreation, travel). We see upside risk if the housing and airfare components surprise. In contrast, the May CPI is expected to be moderate (around 0.1%-0.2%) due to a modest increase in gasoline prices.
- Inflation remains moderate at around 2%, with a temporary surge expected in April due to energy and travel components. Expectations remain well anchored around the midpoint of the target range, supported by the stronger shekel, but face upside risks from higher oil prices.
- Monetary policy: The Bank of Israel is expected to keep the policy rate unchanged at 4.0% in the near term, with only a gradual easing path later in 2026. However, expectations for a rate cut have strengthened amid the recent appreciation of the shekel, although we do not see a rate cut in May or July as likely.
- The coming week will focus on several key data releases from the CBS: March data on exports of services will provide an indication of activity in the high-tech sector. Labor market data, including the average wage for February (with early indications for March), will show wage pressures. In addition, the PIAAC survey results on adult skills will be published, offering insights into long-term productivity.
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