Israel's Consumer Price Index (CPI) fell by 0.3% in May, according to figures has released by the Central Bureau of Statistics. The decline was steeper than economists had expected, as forecasts had pointed to a negative reading of between 0.1% and 0.2%.
Annual inflation now stands at 1.9%, below the Bank of Israel's target range. Economists expect the June CPI to decline by another 0.1%, before rising by 0.4% in July.
The negative reading was driven by several factors, most notably the sharp decline in the dollar's exchange rate against the shekel during May. The stronger shekel contributed to significant declines in fresh fruit prices and transportation costs, reflecting a seasonal drop in airfares.
Separately, housing prices, which are not included in the CPI, fell by 0.3% during the latest measurement period and were down 1.3% compared with a year earlier. The sharpest monthly decline was recorded among homebuyers in Jerusalem, while prices in Tel Aviv resumed their upward trend.
The rental market continued to show signs of pressure. Rents for tenants renewing their leases rose by 2.5% in May, while new tenants paid an average of 6.8% more than their predecessors.
The lower-than-expected inflation reading has eased a significant policy dilemma for Bank of Israel Governor Prof. Amir Yaron. Although inflationary pressures have been increasing globally, prompting a 0.25% interest rate increase in Europe, the latest data indicate that inflation in Israel remains comfortably within the central bank's target range.
The Bank of Israel is scheduled to announce its next interest rate decision on July 6. Market estimates point to a rate cut of 0.25%, with some analysts not ruling out a larger reduction of 0.5%.
Developments related to the agreement with Iran have already had an impact on global markets. Oil prices fell below $95 per barrel, and the reopening of international trade routes is expected to ease supply shortages and, over time, contribute to lower prices and a further moderation in inflation.
The Tel Aviv Stock Exchange, however, reacted negatively to the agreement. Financial shares posted particularly sharp declines, with insurance companies among the worst performers. The dollar, which began the trading day weaker against the shekel, later recovered and ended the session almost unchanged.