Bank of Israel Annual Report 2025

• The intensity of the military conflict declined in 2025 compared with 2024.[1]
• Gross Domestic Product (GDP) grew by 2.9 percent this year, marking an increase relative to the 1.0 percent growth recorded in 2024. The main factor restraining faster expansion was the labor supply constraint, although this eased over the course of the year, particularly following the ceasefire in Gaza.
• The labor supply constraint—largely reflecting the high share of reservists and the absence of Palestinian labor—resulted in a tight labor market characterized by exceptionally low unemployment and a high number of job vacancies. Consequently, wages in the business sector rose at a rapid pace, and the GDP labor share increased.
• Inflation moderated to 2.6 percent in 2025, within the target range and below the previous year’s level. The decline in inflation was supported by monetary policy measures and the appreciation of the shekel against the US dollar, which was largely supported by a reduction in Israel’s risk premium—mainly due to security developments and fiscal restraint—as well as by the global weakening of the dollar.
• Given that inflation remained above target for much of the year, alongside supply constraints and heightened uncertainty surrounding the course of the conflict, the Bank of Israel maintained its policy interest rate until November.
• In November, due to the moderation of inflation and inflation expectations, and in view of the ceasefire agreement in Gaza, the Monetary Committee reduced the interest rate to 4.25 percent. The appreciation of the shekel, continued security calm, and initial signs of easing in the tightness of the labor market led to a further reduction of the interest rate in January 2026 to 4.0 percent.
• The reduction in the intensity of hostilities was accompanied by the Israeli equity market outperforming global markets, an increase in venture capital raised in the high-tech sector, narrowing corporate bond spreads, and an expansion of credit.
• The government budget deficit narrowed during the year but remained elevated, reflected in a continued rise in the debt-to-GDP ratio, which reached 68.5 percent. The improvement in the deficit was made possible by tax increases and stronger-than-expected revenues from direct taxes.
• The housing market was characterized by an expansion in supply alongside a decline in demand. Construction starts and land marketing activity were robust. Transaction volumes declined, and housing prices fell during most months of the year before rebounding toward the end of the year.
• Given expectations that the economic impact of the war will persist even after its conclusion, it is essential that the government formulate a multiyear fiscal strategy aimed at reducing the debt-to-GDP ratio while adequately addressing growing security and civilian needs and supporting sustainable economic growth.

[1] Following the period covered by the Report, in February 2026, the intensity of combat again increased with the start of Operation Roaring Lion – a military operation carried out against Iran.

• The war continued to weigh on economic activity in Israel this year, mainly through its adverse effect on labor supply. GDP grew by 2.9 percent—below its long-term growth trend. Business sector output also grew below its prewar trend. The cumulative loss of output from the beginning of the war through the end of 2025 totaled 8.6 percent of annual GDP (about NIS 177 billion).
• The labor market remained tight in 2025. Unemployment was low and labor supply remained constrained due to reserve mobilization, a decline in the number of non-Israeli workers, and a lower labor force participation rate. Demand for workers remained high.
• Investment increased rapidly, but by the end of 2025 it was still 1.7 percent below its prewar level—particularly due to low investment in construction. The rapid increase in investment in machinery and equipment came mainly from defense-related investment, and its contribution to expanding productive capacity in the business sector was therefore limited.
• Public consumption—both defense and civilian—remained high.
• The fiscal impulse moderated this year due to higher taxation, but remained stronger than before the war. The impulse was mainly due to wage payments to reservists and domestic defense procurement. Signs of crowding out of civilian business activity are evident.
• In 2025, both goods exports and services exports increased rapidly. This increase was concentrated mainly toward the end of the year, whereas until then exports grew moderately. An examination of Israeli exports to the European Union points to a relative decline in exports to countries that are critical of Israel.
• Throughout the year, imports increased at a high rate and provided sources for demand, in view of domestic supply constraints.
• The impact on annual growth resulting from Operation “Rising Lion” was about 0.3 percent of GDP, including the offsetting recovery in subsequent quarters. That is, even excluding the effect of Operation “Rising Lion”, annual growth in 2025 still remained slightly below the economy’s previous growth trend.

• The Consumer Price Index rose by 2.6 percent in 2025, remaining within the inflation target range, after inflation in 2024 was 3.2 percent—above the upper bound of the range. Excluding volatile components and one-off factors, the slowdown in inflation was even more pronounced. The moderation process was volatile, and during most of the year inflation remained above the upper bound of the target range.
• In view of inflation being above the upper bound of the target range for much of the year, supply constraints, and significant geopolitical uncertainty, the Monetary Committee kept the policy rate unchanged at 4.5 percent for most of the year. Given the supply constraints, a faster reduction in the policy rate would likely have contributed little, if at all, to growth while significantly increasing inflation.
• The stability of the policy interest rate during most of the year, alongside the decline in inflation expectations, was reflected in an increase in real yields, thereby contributing to the restraint of aggregate demand and to the easing of inflationary pressures. In November, following the moderation of inflation and inflation expectations and in the wake of the ceasefire agreement, the Monetary Committee reduced the policy rate to 4.25 percent. The appreciation of the shekel, the ongoing improvement in the security situation, and signs of easing in labor market tightness led to an additional rate cut in January 2026, to 4.0 percent.
• The appreciation of the shekel played a major role in moderating inflation. This appreciation was largely due to the decline in Israel’s risk premium following geopolitical developments, and fiscal restraint measures that offset part of the war-related costs, as well as from the gradual pace of monetary easing. Part of the appreciation also reflected the global weakening of the US dollar.
• Inflation expectations converged during the year toward the midpoint of the target range, supporting the moderation of actual inflation.
• Supply constraints in the labor market—alongside the fiscal impulse that was mainly due to high defense expenditures—continued to exert upward pressure on inflation, offsetting part of the effect of the moderating factors. Although preliminary indicators toward year-end pointed to some easing, they still suggested that the labor market remained tight.

• The recovery trend in private sector financing, which began in 2024, accelerated in 2025. It was reflected in an increase in debt across most borrower segments, alongside an expansion of both bank credit and nonbank financing.
• Credit to the business sector expanded markedly—both through the banking system, across all business size groups, and through increased activity in the corporate bond market. This activity was reflected in high issuance volumes and a decline in yield spreads to historically low levels, in line with the global trend.
• The expansion of nonbank financing was supported by an increase in household savings directed to money market funds and mutual funds in place of bank deposits.These developments increased demand for debt instruments in the capital market and contributed to an expansion in the supply of credit to nonfinancial corporations, particularly in the construction and real estate industry.
• The share of bank credit in arrears remained stable and at a low level in 2025, both for households and in credit to the business sector.
• In 2025, new mortgage borrowing remained at a relatively high level, despite the decline in the number of transactions in the housing market. This was partly due to the large share of borrowing associated with past transactions, particularly within the framework of sales promotion campaigns offered by contractors in previous years.
• At the same time, mortgage refinancing remained at a high level, driven mainly by the realization of opportunities to optimize loan terms rather than by cash-flow distress.
• Long-term trends in the characteristics of new mortgages continued this year as well, including longer repayment periods, higher leverage, and a higher paymentto-income ratio. In addition, the average age and average income of new homebuyers increased.
• Nonhousing consumer credit continued to expand in 2025, alongside an increase in the share of nonbank entities in general and credit card companies in particular. The growing use of the Credit Data Register by nonbank entities points to its ontribution to improving their underwriting capabilities, thereby supporting the upward trend in the volume of this credit within total nonhousing consumer credit.

» In 2025, the labor market remained tight, primarily due to significant constraints on the  supply of civilian labor, as a result of the continuation of the fighting through most of the year.

» The labor force participation rate remained below its prewar level, with most of the decline concentrated among young people. The extensive mobilization of reservists led to the absence of many workers from their jobs, although on a smaller scale than in the preceding year.

» With the outbreak of the war, the number of non-Israeli workers declined due to the halt in the entry of Palestinian workers. Over the past two years, the number of foreign workers increased gradually. However, the number of non-Israeli workers remained below its prewar level.

» These supply constraints were reflected in the fact that the number of people employed in the business sector was about 1.5 percent lower this year than in the year preceding the war. This decline, together with rising demand, was reflected in a high job vacancy rate in 2025 (4.5 percent), particularly in industries with a high share of male or young workers.

» The unemployment rate was low, averaging about 3.0 percent.

» Real wages in the business sector increased markedly over the course of the year, exceeding even the growth in GDP per worker. In contrast, in the public sector, real wages eroded relative to their prewar level.

» Negative migration from Israel over the past two years explains only a small part of the decline in labor supply since the outbreak of the war.

» The central government’s budget deficit in 2025 amounted to 4.7 percent of GDP. The general government deficit totaled 6.5 percent of GDP—a decline from 9.0 percent in the previous year—while the debt-to-GDP ratio rose slightly, from 67.6 percent to 68.5 percent.

» The budget deficit was broadly in line with the original target (4.9 percent of GDP), as the expenditure overrun was offset by a positive revenue surprise.

» Defense expenditures in 2025 were only slightly lower than in 2024, despite the lower intensity of the war during most of the year. The fiscal cost of the war that began on October 7, 2023 is estimated at approximately NIS 350 billion over the years 2023–2026 (excluding decisions adopted since the beginning of Operation Roaring Lion—the military campaign against Iran that began in late February 2026), of which about NIS 116 billion were spent in 2025.

» Roughly half of the war-related costs were financed through debt issuance. The share of debt financing declined during the year, reflecting an increase in tax revenues, which was largely due to tax measures amounting to about 1.5 percent of GDP that came into effect in 2025. The government also implemented expenditure-reducing measures, including a temporary freeze on public sector wages.

» The adjustment programs approved alongside the supplementary 2024 budget and the original 2025 budget contributed significantly to strengthening market confidence in the government’s capacity and commitment to address large-scale security shocks, particularly in view of the uncertainty prevailing at that time.

» The structural deficit—which reflects the government’s medium-term policy decisions and expectations regarding future measures—remains somewhat larger than the level necessary to stabilize the debt (around 3.2 percent of GDP), and certainly above the level needed to reduce it.

» Following the war, Israel’s debt-to-GDP ratio increased relative to that of the group of small, open, and advanced economies to which Israel was comparable on the eve of the COVID-19 crisis. The ratio of interest payments to GDP—which was already in the upper third among advanced OECD economies prior to the war—also rose.

» The events of recent years have underscored Israel’s exposure to global and domestic shocks that could sharply raise the debt-to-GDP ratio. It is therefore essential to restore orderly budgetary processes and to redefine fiscal targets, accompanied by credible measures aimed at reducing the debt-to-GDP ratio to a level that would provide Israel with the fiscal space needed to cope with future shocks.

» In view of the implementation of the 2015 insurance reform and of the
COVID-19 pandemic, the number of individuals seeking mental health
treatment increased even before the war. There are growing indications that
the war will lead to a further significant increase in the number of patients
and treatments.
» Since the outbreak of the war, several measures have been taken to strengthen
the mental healthcare system, foremost among them the implementation of
the National Mental Health Program (2024), with an annual budget of NIS 1.4
billion.
» The public mental healthcare system is characterized by long waiting
times, partly due to a shortage of therapists and a lengthy training path
for therapeutic professions, which causes a delay in adapting supply to the
increase in demand.
» Wages in the therapeutic professions are lower than in other academic
occupations, and psychiatrists’ wages are lower than those of specialist
physicians in other fields. The wage agreement signed with public sector
psychologists in 2025 will significantly improve their relative position.

• During 2025, the total number of home purchase transactions declined, and home prices decreased moderately. Against this, the volume of housing starts was high, as was the volume of land purchases by developers in Israel Land Authority (ILA) tenders.
• The number of persons employed in the construction industry returned to its prewar level, due to a marked increase in the number of foreign workers and the entry of Israelis into the industry. However, a shortage of workers still persists, in view of the considerable increase this year in the volume of activity in the industry. This increase was reflected in about 80,000 housing starts and in reconstruction needs.
• The decline in the number of transactions in both new and second-hand dwellings relative to the previous year occurred against the background of the interest rate environment, which remains high relative to the years preceding the outbreak of inflation globally and in Israel, and the attractiveness of the returns offered by the capital market relative to the housing market. The decline in new home transactions also reflected measures to limit contractor sales promotions, as well as the bringing forward of purchases to the end of 2024 in order to precede the VAT increase.
• In view of the increase in construction activity and the decline in new home transactions, the stock of unsold new homes increased this year and reached a high level relative to the past.
• In 2025, the planning institutions approved 223,000 housing units—an increase of about 10 percent relative to 2024. The number of housing units marketed by the ILA, through tenders with a winning bid and without tender, totaled about 60,000 units, similar to 2024.
• In October 2025, about 7,400 housing units in the North, the Gaza periphery, and the Center remained outside the effective housing stock due to warrelated damage. By contrast, negative net migration moderated demand for housing services. Rental prices increased by 3.2 percent during 2025.
• Following the increase in home prices that began in November 2023 and continued through January 2025, home prices declined during most of the year (February–October 2025). In October–November, home prices resumed rising, alongside a slight decline in the stock of unsold new homes. On an annual basis, home prices declined by 0.9 percent.