Israel's Inflation Rate Drops Unexpectedly, Fueling Debate on Interest Rate Cuts

Israel's Central Bureau of Statistics reported a 0.5% decrease in the consumer price index (CPI) for September 2026, compared to August 2026. This brings the annual inflation rate to 1.6% for the twelve months ending September 2026, placing the economy well within the Bank of Israel's price stability target of 1-3% and nearing the lower half of that range. The previous month, August, saw a 0.7% rise in the index, driven by fuel and overseas flight prices.

Most economists had anticipated that transportation and communication costs would lead the September decline. However, the actual drop exceeded expectations, with economists' forecasts ranging from 0.3% to 0.4%. Nissan Avraham, an economist at the Stock Exchange Research Unit, noted that while the annual inflation rate rose to 1.6%, the likelihood of another interest rate cut at the upcoming Bank of Israel meeting on October 21st remains low. He attributed the unexpected decrease largely to seasonal factors, such as the timing of the High Holidays which impacted food prices, and a seasonal drop in airfare following August's peak demand, further influenced by a temporary reduction in fuel excise tax.

Looking ahead, Avraham cautioned that some factors contributing to the negative index are not expected to persist. If the excise tax reduction is not extended beyond October, fuel prices may rise in November, potentially increasing inflation. He also pointed to the global interest rate environment, warning that a widening interest rate gap with the U.S. could weaken the shekel, increase import costs, and reignite inflationary pressures. Despite these concerns, strong domestic macroeconomic data, including robust private consumption and a tight labor market, allow the Bank of Israel to wait and gather more information.

Industry figures offered varied perspectives. Roni Mizrahi, Chairman of Mizrahi & Sons Group, argued for another interest rate cut to further boost the housing market recovery, citing the low inflation and strong shekel. Ido Shaham, a real estate expert, praised the Bank of Israel's stabilization of the economy during the past three years, predicting a strong 2027 for Israel's economy. Eli Paz, a financial planner, saw the low index as evidence of a significant cooling in consumer demand, supporting a rate cut to 3% to stimulate economic growth. However, Tsala Rosenblum Amore, CEO of M. Aviv real estate group, stressed the need for initiatives to accelerate housing market processes, particularly urban renewal and addressing the critical shortage of apartments with protected rooms. Amir Rosenblum, a property management consultant, identified the strong shekel as a major impediment for exporters and foreign investors, hindering economic and real estate market growth.