The July index, to be published today, is a prelude to the escalation in inflation | Yehuda Sharoni

1. The magic has faded

After Benjamin Netanyahu completed this week the hostile takeover of the Likud list to the Knesset and the primaries turned into an unsuccessful farce, the Prime Minister is moving on to the truly challenging task, which is the takeover of the defense budget.

Those of us who are alert have certainly noticed the fact that Netanyahu has stopped speaking in recent weeks about cost-of-living issues: the pumps at the gas station have disappeared, there is no visit to Rami Levy, and the seller at the falafel shop in Rishon LeZion is still waiting for payment from the last elections. One can understand this. How much more can one fabricate AI-reality when a liter of gasoline is over 8 shekels, when the shopping basket is murderously expensive, when rent and housing are in the skies, and the young children who were promised free education are about to be drafted into the IDF. The Prime Minister understands that the cost-of-living card is worn out, and he is betting on security, and in a big way.

He intends to be remembered in the pages of history as Mr. Security, who distributed hundreds of billions of shekels to ensure Israel's security future and the constant maintenance of the fighting fronts. This does not mean that the defense system does not need to purchase stocks of interceptors and other needs.

But this issue can be handled point-by-point. At the government meeting this week, for example, it was decided to divert 850 million shekels intended for promoting investments and encouraging employment in high-tech for urgent defense procurement. Another 150 million shekels came from budget reserves. However, this is only a test run.

But Bibi, as mentioned, is going for the whole pot, including the reopening of the state budget and an addition of tens of billions of shekels for security, while ignoring the position of the professional echelons, led by the Bank of Israel. Bank of Israel Governor Prof. Amir Yaron did not understand where this came from. This will be a poison pill for the next government.

Such a move will inflate defense spending to 8% of GDP, and the defense budget will jump to 200 billion shekels per year. In countless discussions, the Governor has insisted until today on the importance of the need to lower the debt-to-GDP ratio for two reasons: to save on interest expenses and to reduce the burden of expected decrees on citizens the day after the elections.

Finance Minister Bezalel Smotrich, who is not stupid, has supported the Governor's position until today and has long since internalized that there are no free lunches. It is true that Smotrich extorted another few hundred million shekels for the settlements, but at least he acted responsibly when he saved on the waste of tens of billions of shekels in defense spending.

However, with Netanyahu, there are free lunches. A moment before he descends from the stage of history, he decided to leave behind, in practice, scorched earth. Instead of closing fronts and returning Israel to its natural proportions, he has become a serial front-opener and is trying to accustom us to it. This week he boasted that in the last month the Iranians did not shoot at us. How lovely!

The turnaround in his approach began with the psychological preparation at the Accountant General's conference a year ago. "We must prepare to conduct ourselves like Sparta living by its sword," he explained. Later, he prepared us for disengagement from American aid starting in 2028 and for finding financial alternatives to aid in the amount of 3.8 billion dollars per year. In recent weeks, a fantasy has been circulating in his environment about developing a blue-and-white stealth aircraft with an investment of 400 billion shekels. The possibility that such a stealth aircraft will be used by the Netanyahu family for escape flights from Israel is much higher than that it will be used by the Air Force for sorties to Iran. Is there any feasibility 75 days before the elections for the realization of the Prime Minister's world of security fantasies, which even President Donald Trump would not dare to do?

But in order to approve a new state budget with an addition of tens of billions of shekels per year, it is mandatory to convene the Knesset, which is, as remembered, in recess. Amir Ohana, the Knesset Speaker, will of course say "amen" and convene the Knesset, even though according to the guidelines of the Attorney General, "the election period requires acting with restraint regarding the exercise of their powers and refraining, when not required, from irreversible decisions that will make it difficult for the next government to implement its policy according to the will of the voter."

Therefore, there is no reason for the Knesset or the Finance Committee to be convened urgently to approve a new budget, when the opposition does not give its consent. The Syrians are not yet on the fences and one can wait. Netanyahu can claim that these are urgent security needs, the question is why the urgent needs were born precisely two months before the elections.

---

2. Challenged banking

The banking system, with the exception of Mizrahi Tefahot Bank, completed yesterday the publication of the reports for the second quarter. Mizrahi will publish only on Monday and has a reason to highlight its positive results. Assuming that Mizrahi earned 1.5 billion shekels this quarter (about 3 billion shekels in the half-year), the five major banks earned 8.6 billion shekels this quarter compared to 8.34 billion shekels in the second quarter of 2025. They will finish the first half of 2026 with a profit of 16 billion shekels, a slight decrease compared to the first half of 2025.

The highest profit (2.83 billion shekels) was presented by Bank Leumi with an amazing return on equity of 16.3%. The explanation is an increase in credit activity, one-time profits at Leumi Partners, and exceptional efficiency. This bank has been led in recent years by CEO Hanan Friedman. The "punishment" for the excellence is the Bank of Israel's decision to cancel the option plan for Leumi Partners shares that was granted to the CEO and approved legally at the shareholders' meeting. The move has long been accepted in the insurance industry. If the Bank of Israel fears that the plan will distort the CEO's considerations, they should please initiate the cancellation of the salary restrictions for senior officials.

High return on equity is expected to be presented by Mizrahi Tefahot. The results were positively influenced by the high index increase (1.3%) between the comparison periods. Banks with an excess of index-linked assets earned, and on the other hand - banks with an excess of dollar assets (such as Discount or Bank Leumi) were harmed due to the weakening of the dollar. A negative influence that cruelly offset the profit is the "Smotrich tax" courtesy of the Finance Minister, who acted like the last of the communists who deducted 3 billion shekels from the banks' profits and indirectly from the shareholders (the general public). The banks increased credit activity and with it financing profits, but the banks absorbed a decrease in financing income (especially the International) due to the lowering of the interest rate.

Discount Bank published yesterday improved reports with an increase in quarterly profit to 1.2 billion shekels. The return on equity increased to 14%. Discount's challenge is to imitate Bank Leumi in efficiency, and the merger with Mercantile Bank is not a simple challenge. However, just as the International will merge the computing company Matf and similar moves succeeded in the International and Mizrahi Tefahot, there is no reason why it should not succeed in Discount.

Bank reports have represented in the last two years a cumulative profit of about 32 billion shekels per year. The five major banks are traded at a market value of 325 billion shekels, reflecting a multiple of 10 on the annual net profit. The banks' equity multiple (which is the ratio between the value of the banks' shares - 325 billion shekels, to the equity - 225 billion shekels) reflects an inflated value. The market value of Leumi shares is higher by more than 50% than its equity.

Discount Bank stock is traded at the lowest equity multiple (110%), which reflects more or less its equity. I remember that 20 years ago Discount shares were traded at an equity multiple of 38% and the sky did not fall. No investor pounced on the bank's shares as a buying opportunity. In the last three years, the banks have closed the gaps. Bank shares have doubled their value, and have reached, in my estimation, the glass ceiling.

Investment in bank shares is not justified at current risk levels. The slowdown in the real estate market is not sufficiently reflected in the provision required for problematic debts. Banks must urgently find growth drivers in the fields of infrastructure and energy and, of course, continue to improve efficiency. The Netanyahu government has provided them until today with engines of decline. Banks are trying to invent miracle solutions like listing their shares for trading abroad, but these are cosmetic solutions. Foreign investors are already dominant in bank shares today and they know the merchandise well.

A return of 5% per year on bank shares in 2026 will be reasonable, and any return higher than that will be a bonus. For those who are still looking for risk, let them go to technology shares.

---

3. Wait for me in July

The CBS will advance to today at noon the publication of the Consumer Price Index for July, since August 15 will fall tomorrow, on Saturday. The index is expected to rise by up to 0.5%, but the real drama will be in the August index, which will be published a month later. According to analysts' estimates, it is expected to rise by 0.9% and perhaps by 1%.

The August index will be mainly influenced by the jump in energy prices due to the never-ending war against Iran, the strengthening of the dollar, and the rise in flight prices in the summer season. The two upcoming indices, which may total cumulatively 1.5%, constitute an apparent deviation from the price target and perhaps the raising of the head of inflation. But still, in annual terms, it seems that inflation will not cross 2% per year.

Prof. Yaron, who listens to every peep in the heart of inflation, will express his insights in the interest rate announcement to be published on September 1. The decision will be influenced by several factors, for example, the high interest rates and inflation in the world, where they are talking at all about raising the interest rate. The exact insights on this subject will be received by the Governor upon his return at the end of the month from the Governors' conference in Jackson Hole in the USA. The tight labor market, which was expressed in the rise in the average wage and growth data, is another inflationary factor.

Disturbing fuel for inflation is rent prices, which continue to rise without end. And beyond all these, there is the question of the war and with it energy prices. Another factor in the decision is the dollar exchange rate, which has weakened in recent days. Against this background, it will be a drama if the Governor lowers the interest rate at the beginning of September. The next interest rate decision will be made on October 21, about a week before the elections. In light of the exceptional challenges in the economy, it is difficult to see the conservative Governor leading precisely then an interest rate cut.

If so, the signs indicate that the interest rate will remain in the foreseeable future at the current level of 3.5% per year, and perhaps by the end of 2026 one interest rate reduction is possible. If the government after the elections on October 27 proves seriousness of intentions in the field of tax and deficit reduction, perhaps the Governor will go with the flow and reduce the interest rate.