Israel: The Cutfather, Part II

Research evidence excerpt

Israel: The Cutfather, Part II

J P M O R G A N CEEMEA Economic Research

06 July 2026

EM, Economic and Policy Research

Anatoliy A Shal

(971) 4561-2005

anatoliy.a.shal@jpmorgan.com

J.P. Morgan Securities plc

• The BoI delivered the second 25bp cut in a row and sounded fairly dovish

• We continue to expect another 50bp in cuts, likely delivered over the rest

of the year, with risks skewed towards a lower terminal rate

The BoI lowered the policy rate 25bp to 3.5% as universally expected by

consensus. Judging by the ILS reaction, the market saw a tail risk of a 50bp move.

The BoI’s communication was uncharacteristically dovish — the MPC deviated

from the practice of acting dovishly and talking hawkishly.

In its statement, the BoI took a more balanced view on the inflation outlook —

various inflationary factors now work in different directions, while previously pro-

inflationary risks dominated. The emphasis was also placed on the conclusion of

the Iran war and the resulting fall in oil prices and the compression of risk premia.

The BoI’s Research Department assumed that the Iran war would not be restarted

and that the intensity of fighting in Lebanon would decline, and hence reduce the

supply constraints. The economic activity is recovering moderately.

With that said, the BoI’s usual reservations remained in place. The labor market is

tight and the wage inflation has accelerated (partly on compositional effects). Rent

inflation remains elevated even as the housing market has softened. Fiscal policy

remains a risk, specifically if additional defense spending is added to the budget

in autumn.

The Governor’s press-conference also appeared somewhat more dovish than

usual. Apart from taking a victory lap for the suppressed inflation, Yaron repeated