In a report released on Wednesday, the IMF said Israel’s economy has demonstrated resilience despite repeated external shocks but warned that conflicts involving Iran, Hezbollah and Hamas continue to cloud the outlook. The institution said renewed escalation across the region remains the principal downside risk to growth.

The revised projection follows estimated economic growth of 2.9% in 2025. The IMF expects the Israeli economy to expand by 4.4% in 2027, while forecasting inflation to remain close to 2% in both 2026 and 2027 after a temporary increase driven by higher energy prices and supply constraints.

The IMF noted that inflationary pressures are expected despite the shekel appreciating to its strongest level against the U.S. dollar in more than three decades. It said elevated energy costs and supply disruptions are likely to offset some of the disinflationary effects of the stronger currency.

Israel’s economy contracted at an annualized rate of 3.8% during the first quarter of 2026. Following the conflict involving Iran in March and April, the Bank of Israel reduced its own 2026 growth forecast to 3.8%, while the Finance Ministry continues to project economic expansion of as much as 4% this year.

The IMF said its assessment was based on economic data available through June 10.

The Washington-based lender urged Israeli authorities to pursue prudent macroeconomic policies to preserve economic stability while advancing structural reforms aimed at strengthening long-term growth. It recommended rebuilding fiscal buffers through higher government revenue and broader fiscal consolidation to help offset increased defense expenditures associated with ongoing military conflicts.

The IMF also called for a moderately tight monetary policy stance, saying higher energy prices could generate additional inflationary pressures. It said the Bank of Israel should continue monitoring the effects of the conflict on labor supply, the transmission of higher energy costs into domestic prices, exchange-rate movements and the impact of the central bank’s most recent interest rate cut on financial conditions and domestic demand.

The report said policymakers should remain prepared to adjust monetary policy if incoming economic data or heightened geopolitical risks result in renewed inflationary pressures.

The IMF noted that a ceasefire reached in recent weeks between the United States and Iran has contributed to lower global oil prices, although it cautioned that regional uncertainty continues to pose significant risks to Israel’s economic performance.