Israel's September CPI Seen Falling, Yet Annual Inflation Expected to Rise
September's CPI is expected to drop by 0.2%–0.3%, yet annual inflation will likely rise to 1.8%. Consequently, market analysts project the Bank of Israel will hold interest rates steady at 3.25%.
The Central Bureau of Statistics will publish the Consumer Price Index (CPI) for September, with the capital market anticipating a negative figure. According to forecasts by bank economists and leading investment houses, including the chief economists of Meitav and Leader Capital Markets, the index is expected to drop by 0.2% to 0.3%. Despite this, the assessment is that the Bank of Israel will not lower the interest rate again in its upcoming decision next Wednesday.
Factors Behind the Index Decline and the Inflation Paradox
The primary drivers of the anticipated drop in the September index are seasonal corrections in the prices of flights and vacations abroad and domestically following the peak of the summer season, alongside the moderating effect of the reduction in the fuel excise tax. Had the tax not been reduced by half a shekel, the expected drop in the September index would have been wiped out.
Nevertheless, despite the decrease in the index, the annual inflation rate is actually expected to rise. The central reason for this economic paradox lies in last year's data: in September 2025, a particularly sharp decrease of 0.6% was recorded. Because annual inflation is calculated over 12 consecutive months, the departure of this negative index from the calculation and its replacement with the current index—which is expected to be moderately negative at around 0.3%—will cause annual inflation to rise to around 1.8%, compared to 1.5% today. This brings the pace of price increases closer to the 2% target, the midpoint of the government's inflation target range of 1% to 3%.
Monetary Policy and Interest Rate Outlook
The renewed rise in the inflation rate casts considerable doubt on the continuation of expansive monetary policy. On Wednesday of next week, the Monetary Committee of the Bank of Israel will publish its next interest rate decision. After executing three consecutive interest rate cuts, and four since the beginning of the year, to the current level of 3.25%, the consensus in the market is that the rate will not be reduced next week to 3%.
The Bank of Israel is committed to maintaining price stability, and the reversal of the inflation trend toward the 2% threshold requires the central bank to exercise extreme caution.
Furthermore, geopolitical and social uncertainty, alongside the need to prevent a sharp depreciation of the shekel, will force committee members to wait and see whether price increases are reined in before returning to provide monetary easing. Another factor is the forecast that interest rates in the US and Europe will remain high through the end of the year. Consequently, an interest rate cut in Israel appears rather distant and is not expected to occur before the first quarter of 2027.
