The Consumer Price Index (CPI) reading for January released by the Central Bureau of Statistics yesterday, a 0.3% fall, came as a surprise, with analysts having predicted a fall of just 0.2%. The twelve-month inflation rate fell to 1.8%, the lowest since June 2021. We look at the item that surprised everybody, the reason for the fall, the less good news lurking in the CPI figures, and the big question: will the Bank of Israel cut its interest rate next week?
1. The reasons for the sharp fall: Even if the analysts’ predictions had materialized and the CPI had fallen by only 0.2%, annual inflation would still have dipped below 2% for the first time in four and a half years. Why is that? Alongside the appreciation of the shekel, which tends to repress general inflation, another variable comes into the picture: the basis effect.
In simple terms, this means the fact that January 2025’s inflation drops out of the twelve-month calculation. The CPI reading for January 2025, a rise of 0.6%, was exceptionally high because of the increase in the rate of VAT which came into force that month. Now that it is no longer included in the calculation, the average is pulled downwards.
The positive news here is that the twelve-month inflation rate is not expected to rise above 2% in the coming year.
2. The fickle item and those that led the decline: The item that showed the sharpest decline last month was flights overseas, which fell by 8.1%. Ever since the Central Bureau of Statistics changed its method for calculating this item, it has surprised upwards or downwards time after time, and moved the index as a whole, and this time was no exception. Bank Hapoalim chief markets strategist Modi Shafrir calculates that in dollar terms prices of overseas flights fell by 14.1% in January, which compares with an average fall of 6% in January 2024 and January 2025. He says that the overseas travel item by itself brough the general CPI down 0.37%.
Other items that fell sharply last month were hotels and guest houses in Israel (down 6.9%), clothing (down 4.5%), and vehicle insurance (down 1.5%).
3. The bad news - rents rose sharply: After moderating for months, the housing rent item is accelerating. For the month, the rent item actually fell by 0.2%, but this is a small decline for the season. For the year to January, this item rose by 3.8%. For new tenants, the situation is worse: a year-on-year rise of 6%, the sharpest since October 2023.
4. The good news: One encouraging item is vehicle insurance, which fell by 7% in the twelve months to the end of January. In the background to that is the demand by the Capital Market, Insurance and Savings Authority that the insurance companies should reduce the premiums they charge for comprehensive and third-party insurance. In November, the Capital Market, Insurance and Savings commissioner gave the companies an ultimatum to do so by the end of this month. The current decline in premiums was, however, preceded by a sharp rise. According to figures presented in the Knesset in December, comprehensive vehicle insurance premiums rose by 60% in the period 2022-2024.
5. The big question - what will the Bank of Israel do? On Monday next week the Bank of Israel is due to publish an interest rate decision, and the market is wondering what it will do. Last time around, it sprang a big surprise with a second successive interest rate cut, bringing its rate down to 4%. According to the base scenario published by the central bank’s Research Department at the time of the previous decision, the interest rate will be cut twice more this year, meaning that it will reach 3.5% by the end of it. The expectation on the capital market is of a much sharper decline, to 3%.
As far as next week is concerned, opinion is divided. Leader Capital Markets, for example, says that "all in all, the low CPI reading in relation to expectations and the moderation of core inflation work in favor of an interest rate cut next week." Discount Bank also believes that current conditions are ripe for a further cut next week. Harel Finance, on the other hand, estimates that the Bank of Israel will wait this one out.
It is worth mentioning that one of the most significant factors in the Bank of Israel’s decision will be the shekel, which has appreciated considerably in the past few months and is at its strongest against the US dollar for thirty years. The rate of appreciation has moderated somewhat in the past month, however, among other things because of upsets on global markets. Today, the Central Bureau of Statistics will release its preliminary estimate of GDP growth in 2025. Analysts expect a figure of 3%.
Published by Globes, Israel business news - en.globes.co.il - on February 16, 2026.
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