Inflation in Israel could fall to around 3% as early as Friday, potentially paving the way for an interest rate cut before the fall, according to economists.
The Central Bureau of Statistics is set to publish July’s Consumer Price Index, which forecasters expect to show a rise of between 0.3% and 0.5%. Analysts at banks and investment houses have widened their projections after repeatedly missing monthly CPI changes in recent months.
Even with a 0.5% rise, annual inflation would likely ease from 3.3% in June, as the July 2024 CPI jumped by a higher 0.6%. A 0.3% increase this July would pull the 12-month rate down to 3%, placing it at the upper limit of the government’s 1%–3% annual target range.
Such a level, if followed by a modest decline in August, could trigger the Bank of Israel’s first interest rate cut on Sept. 29. No forecasters expect the central bank to lower rates at its next policy meeting on Aug. 20.
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In August 2024, the CPI rose an unusually high 0.9%. A smaller increase this August, data for which is due Sept. 15, would likely push annual inflation below the top of the government’s target range for the first time in months.
The difficulty in forecasting the Consumer Price Index in recent months has stemmed largely from the volatile cost of flights, which have surged or plunged sharply from month to month depending on the security situation. For example, forecasters missed April’s reading entirely — the CPI jumped 1.1% when they had predicted a rise of only 0.5%–0.6%. In May, they anticipated a modest increase, but the index unexpectedly fell 0.3%. In June, they projected a 0.1%–0.2% increase, yet the CPI rose 0.3%.
Beyond airfares, the CPI to be published Friday will also be heavily influenced by higher rental prices (home purchase prices are not included in the index), seasonal summer increases in fruit and vegetable prices and the clothing and footwear category, which is also known for producing surprises.
The Bank of Israel’s benchmark interest rate has stood at 4.5% (prime rate 6.0%) for 20 months, and there is widespread expectation in the economy that the rate will be cut by a quarter point, possibly in the week between Rosh Hashanah and Yom Kippur. If July and August’s CPI readings come in significantly lower than the high figures recorded in the same months last year, the likelihood will increase for the first rate cut since Jan. 1, 2024.
Another important factor in the Bank of Israel’s upcoming rate decisions will be interest rate trends in the United States and Europe. While forecasts suggest the European Central Bank may cut rates soon, economic instability in the U.S. has left analysts uncertain. For now, global expectations are that U.S. rates will not fall under current conditions, and this week the Psagot investment house even predicted no U.S. rate cut before the start of 2026.