The International Monetary Fund has reduced its forecast for Israel's economic growth in 2026 to 3.5 percent, down from a previous estimate of 4.8 percent, citing elevated regional tensions. The revision was announced in a report released on Wednesday, which also warned of a temporary rise in inflation due to higher energy prices and supply constraints, despite the shekel appreciating to a more than three-decade high against the US dollar.
Impact of Regional Conflicts
“The elevated regional tensions are casting a shadow on Israel’s economy,” the IMF stated, specifically referencing conflicts with Iran, Hezbollah, and Hamas. The report acknowledged that the Israeli economy has demonstrated resilience despite repeated shocks, but noted that ongoing geopolitical uncertainty and long-standing structural impediments are expected to weigh on the outlook. “Furthermore, renewed intensification of regional tensions remains a key downside risk,” it added.
The IMF’s downgrade comes after Israel's economy shrank at an annualized rate of 3.8 percent in the first quarter of 2026. The war with Iran in March and April prompted the Bank of Israel to cut its own 2026 growth forecast to 3.8 percent, while the Finance Ministry projects growth of up to 4 percent this year. In 2025, Israel's economy grew by 2.9 percent.
Inflation and Monetary Policy
The IMF expects inflation to rise temporarily due to higher energy prices and supply constraints, despite the shekel's strength. The report recommends that the Bank of Israel maintain a moderately tight monetary policy, as higher energy prices are likely to push inflation higher. However, a recent ceasefire between the United States and Iran has led to a drop in oil prices, which may alleviate some pressure.
“The Bank of Israel should continue to closely monitor war-related effects on labor supply, the pass-through of higher energy prices and exchange rate movements, and the impact of the latest rate cut on financial conditions and domestic demand,” the IMF said. Policymakers need to “stand ready to adjust course” if incoming data or the heightened risk environment lead to renewed price pressures.
Fiscal Recommendations
The IMF advised the Israeli government to rebuild fiscal buffers, for example by raising revenue, and to pursue fiscal consolidation due to higher defense spending required to finance the military conflicts. The report also emphasized the need for structural reforms to boost growth potential. “Israel needs to implement prudent policies to safeguard macroeconomic stability and advance structural reforms,” the IMF stated.
Long-Term Projections
Looking ahead, the IMF projects Israel's economy will grow by 4.4 percent in 2027, with inflation holding steady near 2 percent in both 2026 and 2027. These forecasts are based on data available up to June 10, 2026. The IMF cautioned that the outlook remains subject to significant downside risks, particularly if regional tensions escalate further.
