Editor’s note:
Last week, we looked at a structural anomaly within the Israeli economy: a robust shekel acting as a highly efficient wealth transfer mechanism, subsidizing monopolistic importing cartels while quietly suffocating domestic producers. Back in February, we wrote about the strong shekel crushing tech margins. This week, fresh macroeconomic data turned that theory into a hard reality.
For the first time since the mid-1990s, the US dollar has plunged below the ₪3.00 barrier. In a textbook macroeconomic environment, a currency (the shekel) asserting this level of dominance would act as a massive deflationary hammer, suppressing the cost of imported goods, commodities, and supermarket staples. It should, in theory, provide immense liquidity relief to the Israeli consumer.
Instead, the Central Bureau of Statistics (CBS) reported this week that March inflation rose by 0.4% MoM. While politicians champion the sub-3.00 Shekel, the strong currency is offering zero relief to household balance sheets. Instead, it traps the central bank and penalizes the tech exporters who hold up the national GDP.
— Sophia Tupolev, TV10 Global Editor
TASE weekly snapshot
The Tel Aviv Stock Exchange closed the week with mixed sentiment.
TA-35 Index (TASE:TA35): 🔴 -0.83%
TA-90 (TASE:TA90): 🟢 +0.10%
TA-125 (TASE:TA125): 🔴 -0.62%
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Rockets and feathers: How a nation with a 30-year-high currency sees its imported consumer goods increase in prices
Last Wednesday, the USD/ILS exchange rate breached a critical psychological and historical floor, sliding to ₪2.99. The implications for the Israeli domestic market are profound. Although, this movement is largely a symptom of systemic US Dollar weakness, fueled by American fiscal bloat, the Trump administration’s tariff policies, and dovish expectations for Federal Reserve rate cuts.
Conventional economic models dictate that currency appreciation of this magnitude should aggressively herald deflation. Yet, the CBS data reveals a deeply rigid domestic market. The 0.4% uptick we saw in the March Consumer Price Index (CPI), driven by a 5.2% surge in fresh vegetables and a 3.0% jump in clothing, exposes a failure in the ‘pass-through’ rate of the Israeli currency. Crucially, this data predates the true inflationary shock of the war and might exclude the full impact of the recent surge in energy costs.
The structure of Israel’s consumer market holds a clue. Economists refer to this phenomenon as the Rockets and Feathers hypothesis, an asymmetry where retail prices shoot up like rockets during global supply shocks, but drift down like feathers when input costs, such as foreign exchange rates, collapse.
Mega-importers and exclusive distributors are capitalizing on the sub-3.00 shekel to secure foreign goods at historic discounts. However, shielded by Byzantine regulatory barriers, kosher certification moats, and entrenched market concentration, these oligopolies maintain total pricing power.
These entities may be executing a textbook case of economic rent-seeking, leveraging state-sanctioned regulatory barriers to extract excess wealth from the consumer without contributing any corresponding value to the supply chain.
Instead of competing on price and passing this currency dividend to the consumer, they may be hoarding the margin differential. The sticky inflation currently punishing the Israeli consumer is no longer driven by global supply chain dynamics, but by local monopolistic friction.
Earnings season will test this argument, so stay tuned. As the major food and retail conglomerates such as Diplomat Holdings (TASE:DIPL) or Fox Group (TASE:FOX) report their quarterly results, a glaring expansion in gross margins will reveal if the FX surplus is being captured at the corporate level.
Stagflation straitjacket
For the Israeli consumer, sticky inflation is merely frustrating. For the Bank of Israel, it is paralyzing. The central bank has been effectively cornered into an impossible bind, tasked with navigating a stagflation environment with a restricted toolkit.
The CBS Business Tendency Survey released this week paints a harrowing picture of the domestic, non-tradable economy collapsing under the compounding weight of elevated interest rates and the geopolitical fallout of Operation Roaring Lion. The data is unequivocal: the retail and construction sectors have flipped into negative growth territory. A staggering 89% of hospitality businesses cited the security situation as a severe operational constraint. Most tellingly, small businesses are feeling pessimistic. The net sentiment balance for micro-industrial enterprises (firms with under 10 employees) plummeted to -25.7.
Indeed, these SMEs are facing an acute liquidity crisis. The Ministry of Finance’s Accountant General implicitly acknowledged the severity of the threat this week by rushing the launch of the ‘Lion’s Track’ state-guaranteed loan fund (offering Prime + 1.7% and critical grace periods). But this is a fiscal band-aid, a debt-driven forbearance measure designed to front-run a wave of insolvencies.
What the SME sector actually requires is monetary easing. They need the Bank of Israel to cut the benchmark interest rate to lower their crushing debt-servicing costs. But the BOI cannot pivot to accommodation. The stubborn 0.4% MoM CPI print, combined with a highly alarming 5.9% spike in new residential rental contracts, strictly prohibits a rate cut. To lower rates now would risk unmooring inflation expectations entirely. Consequently, the BOI is forced to maintain a restrictive monetary stance, actively suffocating the domestic economy to fight an inflation that is largely driven by structural monopolies and housing supply deficits.
The shadow tax on the tech sector
Israel continues to attract formidable cross-border capital flow, evidenced this week by Palo Alto Networks’ strategic acquisition of Israeli AI-defender Koi, and EagleNXT’s $10 million equity injection into defense-drone manufacturer ThirdEye Systems. Yet, beneath these headline-grabbing transactions, the day-to-day operational reality for Israeli exporters is deteriorating due to a severe currency mismatch.
Global tech contracts and M&A valuations are universally denominated in US dollars. To understand the sheer scale of this currency drag, look at the recent M&A market. When Google acquired Wiz for $32 billion on March 18, 2025, that capital injection was worth roughly ₪115 billion to the local ecosystem. Today, at a sub-3.00 exchange rate, that exact same $32 billion valuation yields just ₪95 billion. That is a staggering ₪20 billion, a 17.39% contraction, in local purchasing power wiped out by FX mechanics alone.
While repatriated top-line revenue shrinks, operational expenditures remain firmly anchored in the expensive shekel. For US-based multinationals operating massive R&D hubs in Israel, the math is becoming untenable. These tech giants fund their global operations in dollars but pay their local workforce in shekels. With the exchange rate dropping below 3.00, the dollar-cost of maintaining those Israeli payrolls just spiked by tens of percentage points. Given that Tel Aviv software engineers are already among the most expensive in the world, this severe currency shock threatens to erase the cost-benefit of hiring locally.
If the USD/ILS pair remains depressed, multinational tech firms and local unicorns may accelerate the offshoring of R&D headcount to cheaper jurisdictions to protect their margins. If the threat of multinational hiring freezes or capital flight becomes severe enough, it could be the ultimate catalyst that forces the Bank of Israel’s hand, compelling the central bank to cut interest rates to devalue the shekel and save the tech sector, even at the risk of letting domestic inflation run hot.
The gap between the state’s wealth and the citizen’s prosperity
Ultimately, the events of this week highlight a massive divergence between Israel’s sovereign macroeconomic health and its microeconomic reality.
Institutional capital markets remain highly confident in the state’s legacy financial architecture. This was demonstrated perfectly this week by the overwhelming ₪805 million institutional demand for Migdal Insurance’s Tier-1 subordinated debt issuance, which locked in a highly competitive 108 bps spread. Furthermore, the Citizens of Israel Fund (the sovereign wealth fund managing natural gas levies) reported a massive 18.4% nominal return for 2025, pushing its assets under management to $2.8 billion.
For foreign credit rating agencies like Moody’s and S&P, a $2.8 billion sovereign gas fund and a fortress-like currency signal long-term fiscal discipline. The sovereign balance sheet is, by all metrics, resilient.
But sovereign wealth does not underwrite the payroll of a struggling contractor in the North, nor does it subsidize the margins of a cyber-security startup bleeding cash on local salaries. When policymakers assess the health of the Israeli economy strictly through the lens of sovereign credit ratings and an unyielding currency, they are observing a mirage.
Until the Israeli government summons the political will to dismantle the importing cartels, enact aggressive supply-side housing reforms, and allow the historic strength of the shekel to actually reach the domestic consumer, the gap between the state’s wealth and the citizen’s prosperity will only widen. Through this lens, the ₪2.99 dollar may not be an economic victory, but a gilded trap.
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The English TV10 newsletter is edited by Sophia Tupolev. We love to hear from you.
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Disclaimer: This brief is for informational purposes only and does not constitute investment advice. All data is current as of publication date.
