March 2026 Market Insights: Inflation Pressures, Hawkish Signals, and Stagflation Fears
Market Updates
March was characterized by heightened volatility across both Israeli and global markets following the outbreak of war with Iran. Early in the month, markets initially priced in the possibility of a short conflict and potential progress in regional cooperation — including a possible expansion of the Abraham Accords — leading to a period of relative optimism. However, as the conflict persisted, sentiment shifted. Rising oil prices, increasing inflation expectations, and broader geopolitical uncertainty weighed on risk assets through the remainder of the month.
Market Performance in March
Israeli equities declined across the board
Israeli Equities:
TA-35: -0.7%
TA-90: -4.0%
TA-125: -0.9%
Bond markets posted modest advances during the month.
Israeli Bonds:
Tel-Bond 60: -0.0%
Tel-Bond Shekel: -0.6%
The yield on Israel’s 10-year government bond rose to 4.12% from 3.84% in February, reflecting increased risk premium due to the regional war.
Macro Picture
February CPI came in at 0.2% month-over-month, bringing annual inflation to approximately 3.0% — the upper end of the Bank of Israel's 1%–3% target range. The ongoing conflict is expected to add further upward pressure, with current estimates pointing to an incremental inflationary impact of 0.4%–0.6% relative to pre-conflict forecasts. Despite this, medium-term inflation expectations remain anchored near the midpoint of the target range.
The Bank of Israel held its policy rate at 4.0% but struck a more hawkish tone. Updated forecasts reflect a combination of slower growth and higher projected inflation, pushing expectations for rate cuts further out. A more gradual and delayed easing cycle now appears to be the base case.
Government bond yields rose through the month, pressured by both global dynamics and domestic factors. Uncertainty around the conflict's fiscal trajectory has raised expectations for higher government issuance, with longer-duration bonds bearing the brunt of the move.
In foreign exchange, the shekel experienced elevated volatility — initially strengthening before reversing, with USD/ILS ending the month around 3.16, reflecting a combination of geopolitical developments and broader dollar strength.
On the credit side, Fitch reaffirmed Israel's A rating but maintained its negative outlook, citing increased fiscal pressures and the prolonged uncertainty of the conflict. The sovereign profile remains stable for now, though the negative outlook signals that the margin for further deterioration is limited.
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