Israel’s May Inflation Reading Could Decide Whether Rates Are Cut in July

Israel’s consumer price index for May will be published Monday and could prove decisive for the Bank of Israel’s next interest-rate meeting, scheduled for July 6. Most forecasters expect the index to fall by 0.1% to 0.2%, after April surprised to the upside with a 1.2% jump and annual inflation at 1.9%. The expected decline is being driven by a stronger shekel, cheaper airfares, and flat housing prices.

The key policy question is whether inflation remains within the Bank of Israel’s 1% to 3% target range. Any upside surprise could push Governor Amir Yaron toward caution and no rate cut, while a result in line with forecasts could support a 0.25 percentage-point reduction to 3.5% and help equities. Market pricing currently implies a 95% chance of a cut to 3.5% next month and a rate of about 2.9% in a year.

Lider Capital Markets chief economist Yonatan Katz expects a 0.2% drop, citing lower airfares, stagnant housing prices and slightly lower food prices. He said the stronger shekel has reduced import costs and should continue easing inflation in tradable goods, even if the weaker dollar has not fully reached consumers. Bank Hapoalim chief market strategist Modi Shperir also sees a 0.2% decline, about 2% annual inflation, and 1.7% inflation over the next 12 months.

Shperir added that falling oil prices could shave 0.1% off July’s CPI, while Brent is expected to be around $80 a barrel in a year, versus about $87 now. He also noted that higher Chinese industrial prices and a stronger yuan may support global inflation. Mizrahi-Tefahot chief economist Ronen Menachem expects a 0.1% drop and annual inflation rising from 1.9% to 2.1%, with clothing and footwear adding pressure but the shekel limiting it. Phoenix chief economist Matan Shtrit and Bank Discount economists also expect a 0.1% to 0.2% decline, with transport and communications, imported goods and stable housing helping the moderation.