January 2026 Market Insights: Equity Strength, Bond Stability, and Rate Cuts in Israel
Market Updates
January was characterized by continued strength in Israeli equity markets, with the Tel Aviv 125 Index surpassing the 4,000-point threshold for the first time. Early-month trading was driven by broad-based gains, led by defense and renewable energy stocks. As the month progressed, performance moderated amid rising geopolitical tensions and renewed tariff rhetoric from U.S. President Donald Trump, which weighed on global risk sentiment.
Market Performance in January
In Israel, major stock indices surged to new highs:
Israeli Equities:
TA-35: +10.3% (record high)
TA-90: +4.8%
TA-125: +9.1%
Bond markets posted modest advances during the month.
Israeli Bonds:
Tel-Bond 60: +0.3%
Tel-Bond Shekel: +0.9%
The yield on Israel’s 10-year government shekel bond declined to approximately 3.84%, compared with 3.91% at the end of December, reflecting expectations for a more accommodative monetary stance and continued moderation in inflation.
Macro Picture
Contrary to prevailing forecasts, the Bank of Israel reduced the policy rate by 25 basis points to 4.0% in early January, marking the second consecutive rate cut. The decision reflects continued moderation in inflation alongside sustained shekel appreciation, both of which are expected to lower financing costs across the economy, particularly in the mortgage market.
The central bank signaled that at least two additional rate cuts are likely over the course of the year. According to its updated projections, the policy rate is expected to reach approximately 3.5% by year-end, while GDP growth in 2026 is forecast at 5.2%, with inflation declining to 1.7%.
The December CPI, published in January, was essentially flat, bringing full-year 2025 inflation to 2.6%, comfortably within the Bank of Israel’s target range. Notably, housing prices posted a modest increase following eight consecutive months of declines, suggesting early signs of renewed activity in the real estate market.
Looking ahead, the January CPI (to be published in February) is expected to show a materially lower year-over-year reading due to the base effect of last year’s VAT increase. Excluding this technical effect, inflation may fall below 2.0%, potentially providing further room for monetary easing, subject to macroeconomic stability.
The shekel continues to trade at levels not seen in several years, supported by broad U.S. dollar weakness driven by political uncertainty in the United States. This currency strength persists despite ongoing regional security tensions, reflecting sustained capital inflows and investor confidence in Israel’s macro framework.
Nevertheless, the foreign exchange market remains highly sensitive to geopolitical developments. A prolonged escalation or renewed instability could reintroduce volatility and pressure the currency.
During the month, Moody’s upgraded Israel’s credit outlook from “negative” to “stable,” while affirming the sovereign rating at Baa1. The revision reflects reduced geopolitical risk relative to the prior year and recognition of the Israeli economy’s resilience. Moody’s expects economic growth to recover to approximately 5% in 2026, supporting sovereign financing conditions and bond market stability.
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