May Inflation Data Could Delay Another Israeli Rate Cut

Israel’s annual inflation rate is expected to rise again above 2% on Monday, and that could postpone a second consecutive interest rate cut at the start of next month. Economists at banks and investment houses expect the May consumer price index to range from a 0.1% increase to a 0.1% decline, but even a slight monthly rise would push the annual rate above its current 1.9% level because the May 2025 index fell 0.3%.

The expected components are mixed. Airfares, which jumped unusually in April, should ease in May. Clothing prices are also expected to fall seasonally after spring holiday increases, helped by end-of-season sales. Imported goods may become cheaper because of the sharp drop in the dollar and euro in May, even though the trend reversed only in early June. Rents, which carry significant weight in the index, continued rising in May, while most basic food prices stabilized somewhat.

If the May CPI lifts annual inflation by 0.3% to 0.4%, above 2%, forecasters say Bank of Israel will be unable to continue cutting rates at the Monetary Committee meeting on July 6. If the index is negative, they say Governor Amir Yaron would likely be satisfied and lower the rate by a quarter point to 3.5%.

That view is based in part on Yaron’s remarks at the Eli Hurvitz Conference a few days ago, when he said faster rate cuts would become possible if inflation falls later this year. Bank of Israel is also watching U.S. inflation, which has recently risen sharply, mainly because of higher energy prices linked to the conflict in the Middle East. If the U.S. moves to raise rates, Yaron may decide Israel should wait before cutting again. Over the weekend, the European Central Bank raised rates by a quarter point to 2.25% for the first time since 2023.