The banks’ forecasts for the Israeli economy in 2026 predict recovery in growth, moderating inflation, and a stable shekel. Predictions for interest rate cuts range from two to four. Everything however depends on it being a quiet year from a security point of view, in Israel and globally.
Leumi: Potential in software companies
1. Two interest rate cuts expected: As expressed in the derivatives market, investors expect two further interest rate cuts of 0.25% each, and that the Bank of Israel’s rate at the end of 2026 will be 3.75%. This is in line with the estimates of the Bank of Israel Research Department.
2. The Bank of Israel is unlikely to intervene in the foreign exchange market: If the central bank buys foreign currency, it will be in small amounts only to slow the rate of appreciation temporarily, but not to reverse the trend.
3. The software sector holds greater upside than semiconductors: While semiconductor stocks are at historical highs, the software sector is priced below the average. Historically, such pricing gaps lead to rotation of capital towards companies that have not yet exhausted the growth potential.
Written by Bank Leumi foreign exchange and derivatives strategist Kobby Levi and foreign equities analyst Nir Orgad.
Hapoalim: Lower growth than expected
1. Growth will rise, but by less than official estimates: Bank Hapoalim’s GDP growth forecast for 2026 is 4.3%, lower than that of the Bank of Israel and the Ministry of Finance, which predict 4.7% and 5.3% growth respectively. Among the bank’s reasons are the constraints of a labor shortage, accelerated private consumption abroad, and inflation. In addition, cuts in government services over time load costs onto the private sector and harm growth.
2. Inflation will continue to fall: The bank expects annual inflation in 2026 of 1.9%, well within the Bank of Israel’s 1-3% target range. This means that interest rates will fall during the year, but not dramatically. The expectation is of two to three rate cuts. Many factors support lowering interest rates, but the Bank of Israel will be cautious and will loosen the monetary reins gently.
3. Sectors that will stand out: Bank Hapoalim sees basic infrastructure stocks such as power and communications performing positively. Telecommunications stocks are also seen standing out. Another interesting sector, though not as cheap as it was, is IT. Defense companies will continue to see high demand despite the ceasefire in Israel and the prospect of a ceasefire in Ukraine. The semiconductors sector is characterized by high volatility, but the Israeli companies operate in niches in which demand will only grow.
4. Retailing in a problematic position: The reopening of Israel’s skies and the doubling of the amount for tax-free personal imports will have a negative impact, but these are not the only factors. The cost of living is once again a focus of attention, and it is not certain that retail chains will be able to pass on all higher costs to consumers. Their inputs are rising and competition is growing. Another sector about which there are doubts is income producing real estate. On the one hand, interest rates are expected to fall, which will make things easier for the companies. On the other hand, construction is slowing. As soon as you go outside central Tel Aviv, you don’t see the price rises and lease renewals that there were in the past. The dynamic here is much more obscure than it was before the war.
5. Shekel-dollar rate will be stable: As long as we don’t see some very significant external development, such as resumption of the war with Iran or, by contrast, expansion of the Abraham Accords, we shall probably remain at around current levels.
Written by analysts of the Bank Hapoalim Research Unit.
Mizrahi-Tefahot: The shekel will maintain its strength, on one condition
1. Recovery in growth: Given security quiet, we expect GDP to grow by 4.5-5%, from recovery in industry, retailing, and real estate, with a continued positive trend in exports, with an emphasis on technology. We estimate that the labor shortage in construction will reduce, and that that will also make a contribution. A fall in interest rates will assist private consumption and investment. The tourism sector, which has high added value, is also expected to recover.
2. A significant fall in inflation: Inflation is moderating, and it will gradually shift towards the middle of the Bank of Israel target range (2%). This is because of lagging effects of the high interest rates, the strengthening of the shekel, and moderating housing prices. A tight labor market and upward pressure on wages will challenge the process but will not stop it.
3. A challenging deficit target: The government has set a very ambitious fiscal deficit target (3.2% of GDP) and will have to cut spending by NIS 30 billion. The year will start with a continuation budget (a restraining factor) but it will be an election year and a great deal depends on approval of the budget. To make it easier for the Bank of Israel to consider cutting interest rate further and for the credit rating agencies to upgrade Israel’s sovereign rating, the government will have to demonstrate that it is willing and able to put the debt and deficit ratios on a downward path again.
4. Two to three interest rate cuts: The Bank of Israel will maintain a cautious, data-dependent policy, and will not adopt a monetary expansion agenda. The caution is required because the geopolitical calm is still fluid, economic growth is not showing urgency, and the bank will have to be convinced that the government is really acting to reduce the deficit.
5. A stable shekel-dollar rate: In our view, most of the factors that supported appreciation of the shekel have been exhausted. In the absence of extraordinary events, it is probable that the shekel-dollar exchange rate will remain about where it is now, perhaps with a slight tendency towards appreciation. Expansion of the Abraham Accords, however, will lend strength to further appreciation of the shekel. On the other hand, a resumption of fighting, God forbid, will be liable to cause a sharp depreciation.
Written by Ronen Menachem, chief markets economist at Mizrahi-Tefahot Bank.
Discount: High growth rate
1. An optimistic growth forecast. Real economic growth will recover in 2026 and will amount to 4.5-5.5%. The balance of probabilities tends towards the higher end, if security stability is maintained. This is one of the sharpest growth rates in the West.
2. Inflation will continue to moderate: By the end of 2026, the inflation rate will be 1.5-2.0%, with price rises of most items in the Consumer Price Index moderating. The trend will be supported by the cumulative effect of the strength of the shekel and the easing of some supply constraints. No VAT rate increase is expected in 2026, and rises in some areas, such as arnona (local property tax) will be smaller than in 2025.
3. The Bank of Israel will cut its interest rate at least three times: Real short-term interest rates in Israel (the Bank of Israel rate minus 12-month market inflation expectations) are high in relation to rates that prevailed before the financial crisis and in relation to world rates. Further moderation in inflation together with a decline in Israel’s risk premium and the strength of the shekel will support a continued process of interest rate cuts.
Deficit will be 3-4% of GDP: This is thanks to recovery from the war along with relatively high economic growth and continued high tax collection. In our view, the main risk factor is the materialization of the scenario of a serious military escalation, which will bring a higher than planned rise in defense spending.
5. Government bond yields will fall: Yield levels on Israel government bonds are still high by historical standards. In the next few months, yields can be expected to fall, particularly at the short end of the yield curve. The situation at the end of 2026 is expected to be more complex, because of the uncertainty over the trend in 10-year yields in the US.
Written by Shmuel Katzavian, financial markets strategist at Israel Discount Bank.
First International: 3-4 interest rate cuts
Recovery in growth, as long as there is no security deterioration: We saw the first buds in the GDP figures for the third quarter. GDP rose by an annualized rate of 12.4% in comparison with the second quarter, which was particularly weak because of the effects of the Rising Lion operation against Iran. As for 2026, the forecasts of the Bank of Israel and the Ministry of Finance speak of growth of just over 5%, and our forecast for the year ahead is 4.8-5%, assuming that there is no deterioration in the security situation.
2. The labor shortage will continue: The ratio between the number of vacant jobs and the number of unemployed is still high, and the rate of wage increases continues to rise. The effects of the war are still visible in the hit to the supply of labor, and the assessment is that the labor shortage will continue. Thus the labor market will remain tight, with an unemployment rate expected to stay low in 2026 at 2.5-3%, and a continued trend of rising wages.
3. A year of interest rate cuts: The expectation is that inflation will continue to moderate next year, with the rate nearing the middle of the Bank of Israel’s target range (2%). There are, however, always risks of the reverse happening in the disputatious reality of the Middle East, to which must be added the fiscal expansion embodied in the new budget, and the supply constraints in the labor market. In our view, the Bank of Israel will cut its interest rate three to four times in 2026.
4. The debt:GDP ratio will revert to falling: After two years of huge defense spending and a jump in the debt:GDP ratio from 60% to nearly 70%, 2026 has to be a year of change of direction, of fiscal restraint and a return to the trend of a decline in the ratio. The fiscal deficit target recently approved in the state budget is 3.9% of GDP. Since it is higher than earlier target of 3.2%, it is highly important that fiscal restraint should be maintained so as not to harm market confidence.
Will the local stock market continue to display strength? The local market is not cheap, both in relation to past prices and in relation to other markets, but it would appear that there are still reasons for optimism, and we shall mention a few of them: a narrowing of the fiscal deficit; the decline in the risk premium; and an expectation of further strengthening of the local currency, which will support local investment. We therefore remain optimistic and recommend focusing on the leading indices, in defense, infrastructure, and real estate.
Written by Dan Ellis, head of capital markets research at First International Bank of Israel.
Published by Globes, Israel business news – en.globes.co.il – on December 28, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
