By Steven Scheer
JERUSALEM, Feb 5 (Reuters) - Israel's economy is expected to grow 4.8% in 2026 following a ceasefire in Gaza, after a 2.9% rate in 2025, but renewed regional tensions could limit growth, the International Monetary Fund said in a report on Thursday.
The IMF said that following the ceasefire in October, economic activity had accelerated markedly and, assuming no renewed hostilities, growth was projected to strengthen in the near term, driven by "pent-up private consumption and a rebound
in investment, while government consumption declines".
It noted that the two-year conflict with Palestinian militant group Hamas left a substantial legacy of high defence spending, while labour supply was constrained by extended military mobilisation and reduced availability of non-Israeli workers.
"These pressures would compound longstanding structural challenges — such as persistently low labour market participation among specific groups — and weigh on the medium-term economic outlook," the IMF said, referring to ultra-Orthodox Jewish men and Arab women.
FURTHER FISCAL CONSOLIDATION NEEDED
While the ceasefire halted most fighting, it has not stopped entirely. Both sides have accused one another of violating the deal's provisions.
"There are downside risks (to growth), including from potential renewed regional tensions," the IMF said.
The IMF said additional fiscal consolidation was needed for Israel's debt burden, which jumped during the war, to decline, while also safeguarding adequate civilian spending.
Parliament last week gave its initial approval to the 2026 state budget draft, but it was still unclear whether it would receive final approval by its March 31 deadline due to divisions within the ruling coalition. Failure to pass the budget by the end of March would trigger new elections.
The IMF said a moderately tight monetary policy has been appropriate and supported reducing inflation back into an official 1-3% annual target.
The rate was 2.6% in December and the IMF sees a level below 2% this year as demand pressures are more than offset by the lagged effects of a strong shekel and easing capacity constraints.
The central bank has lowered its benchmark interest rate by 25 basis points in each of its last two meetings to 4% but the rate is forecast at 3.5% at the end of 2026. The bank forecasts 5.2% growth in 2026, against 2.8% in 2025.
"With inflationary pressures and supply constraints easing, gradually lowering the policy rate toward neutral is appropriate," the IMF said. "However, the Bank of Israel should remain ready to adjust course should inflation surprise on the upside."
(Reporting by Steven Scheer; Editing by Alex Richardson)
