Inflation data points to a bigger rate cut, but Israel’s central bank may stay cautious

Israel’s Consumer Price Index for May 2026, published Monday evening, fell 0.3%, beating forecasts for a 0.1% decline and leaving annual inflation at about 1.9%, unchanged from the previous month. That keeps inflation within the government’s 1% to 3% target for a 10th straight month, and marks the fourth month near the target midpoint.

The report also showed a calmer price environment overall. Core measures remain subdued, producer prices are falling, housing prices continue to decline, the shekel remains strong, and global oil prices have dropped sharply after the temporary U.S.-Iran agreement. According to the Central Bureau of Statistics trend data, annual inflation is now 1.4%, and only 0.9% when housing is excluded.

The article says that stripped of seasonal noise and short-term volatility, underlying inflation is moving closer to the lower end of the target range. Expectations in futures markets also point to inflation nearer 1.5% than 2%. Food prices are barely rising, transport prices have fallen, airfares have dropped sharply, and much of the remaining pressure is concentrated in housing and rent.

Against that backdrop, the key question is the Bank of Israel’s August rate decision. After a 0.25% cut last month to 3.75%, many economists would argue the data justify a larger 0.5% reduction. SHIR futures, formerly Telbor, imply a roughly 3.12% policy rate by the end of November and about a 96% chance of a cut at that meeting. Still, the article says the central bank is likely to move more slowly, because it is managing risk and must account for uncertainty over the U.S.-Iran deal, oil prices, Israeli politics, the deficit, and possible security shocks.