Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in April 2025 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] According to the forecast’s baseline scenario, GDP is expected to grow by 3.5 percent in 2025, and by 4.0 percent in 2026. The inflation rate in the coming four quarters (ending in the first quarter of 2026) is expected to be 2.5 percent, inflation in 2025 is expected to be 2.6 percent, and inflation in 2026 is expected to be 2.2 percent. The average interest rate in the first quarter of 2026 is expected to be 4.0 percent.
This forecast was formulated under the assumption that the resumption of fighting in Gaza will not extend beyond the second quarter of 2025, and that during this period, there will be no serious restrictions on activity on the home front (in contrast with the situation at the beginning of the war). In addition, the forecast contains assessments regarding the impact of the import tariffs announced by the United States on April 2, 2025. The working assumption underlying the forecast is that the increase in tariffs worldwide will lead to a 4 percent decline in the volume of world trade by the end of 2026 (relative to a scenario without tariffs). The forecast is characterized by an exceptionally high level of uncertainty, given the uncertainty regarding the scope and effects of the trade war that is developing globally and the possibility of more severe security scenarios than those reflected in the forecast. In our assessment, the risks to the growth forecast tend downward, while the risks to the inflation, interest rate, and deficit forecasts tend upward.
The forecast
The Bank of Israel Research Department compiles a staff forecast of macroeconomic developments based on several models, various data sources, and assessments based on economists’ judgment. The Bank’s DSGE (Dynamic Stochastic General Equilibrium) model—a structural model developed in the Research Department and based on microeconomic foundations—plays a prime role in formulating the macroeconomic forecast.[2] The model provides a framework for analyzing the forces that have an effect on the economy, and allows information from various sources to be combined into a macroeconomic forecast of real and nominal variables, with an internally consistent “economic story”.
[1] The forecast was presented to the Bank of Israel Monetary Committee on April 6, 2025, prior to the decision on the interest rate made on April 7, 2025.
[2] An explanation of the macroeconomic forecasts formulated by the bank of Israel Research Department, as well as a review of the models on which they are based, appear in the Bank of Israel’s Inflation Report 31 (second quarter of 2010), Section 3c. A Discussion Paper on the DSGE model is available on the Bank of Israel website, under the title: “MOISE: A DSGE Model for the Israeli Economy,” Discussion Paper No. 2012.06.