US Bond Yields Surge Influences Israel's Interest Rate Decision Amid Economic Uncertainty
In the latest episode of Calcalist's Money Engines podcast, economist and chief strategist Uri Greenfeld discussed the upcoming Bank of Israel monetary committee decision scheduled for Tuesday at 16:00. Despite inflation standing at a low 1.5%, a reduced deficit of 3.3% over the past year, a strong shekel-dollar rate below 3, and near-historic low unemployment, the market remains divided with about a 50% chance of an interest rate cut. The market has already priced in only one and a half cuts for the coming year, down from three previously expected.
The podcast analyzed two main reasons for this uncertainty. Externally, US bond yields have sharply risen in the past two weeks, with the 30-year yield hitting around 5.2%. This increase is attributed to a growing US deficit expected to exceed 6% of GDP, Federal Reserve uncertainty under Kevin Warsh, Japanese central bank selling US bonds amid currency battles, and massive tech company bond issuances funding data centers, crowding out government debt. The episode also examined Treasury Secretary Scott Bassett's plan to buy long-term bonds, which the market quickly realized lacked new funding.
Domestically, when excluding export figures that do not reflect actual goods leaving Israel, such as Nvidia's exports, growth in the first half of 2026 is only about 1%, supporting the case for a rate cut to stimulate demand. However, the looming budgetary challenge complicates matters. With elections two months away, any Bank of Israel decision risks being politicized. Post-election, a defense budget between 200 and 400 billion shekels could consume up to a third of the budget, potentially pushing the deficit to 6% of GDP. This fiscal dilemma remains largely unaddressed ahead of the elections.
The episode also covered Nvidia's earnings report, highlighting that the company's comments on "endless demand" had a greater market impact than the actual numbers. The podcast segmented topics from the Bank of Israel's rate decision to US bond yield drivers and Israel's fiscal challenges, providing a comprehensive overview of the economic forces at play.
