By Steven Scheer

The International Monetary Fund lowered its estimate for Israel's economic growth in 2026 to 3.5% from a prior 4.8%, it said on Wednesday citing regional tensions.

In a report, the IMF also expects inflation to rise temporarily due to higher energy prices and supply constraints despite shekel appreciation to a more than three-decade peak against the dollar.

"The elevated regional tensions are casting a shadow on Israel’s economy," it said, referring to conflicts with Iran, Hezbollah and Hamas.

The IMF noted that the economy has shown resilience despite repeated shocks, but that elevated regional 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 said.

Israel, the IMF said, needs to implement "prudent" policies to safeguard macroeconomic stability and advance structural reforms to boost growth potential.

After a 2.9% growth rate in 2025, the war with Iran in March and April led the Bank of Israel to trim its 2026 growth forecast to 3.8%, while the Finance Ministry sees growth of up to 4% this year.

Israel's economy shrank an annualised 3.8% in the first quarter.

The IMF projects Israel's economy will grow 4.4% in 2027, with an inflation rate holding steady near 2% in 2026 and 2027.

Forecasts, it noted, were based on data up until June 10.

The IMF recommended Israel's government rebuild fiscal buffers for example by raising revenue, along with fiscal consolidation, due to higher defence spending to finance the military conflicts.

The IMF also seeks moderately tight monetary policy since higher energy prices look to push inflation higher.

In recent weeks, a ceasefire between the United States and Iran has led to a drop in oil prices.

"The Bank of Israel should continue to closely monitor war-related effects on labour 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," it said.

Policymakers need to "stand ready to adjust course" if incoming data or the heightened risk environment lead to renewed price pressures.