Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in January 2025 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] According to the forecast’s baseline scenario, the assessment is that GDP grew by 0.6 percent in 2024 and that it is expected to grow by 4.0 percent in 2025, and by 4.5 percent in 2026. The inflation rate in the coming four quarters (ending in the fourth quarter of 2025) is expected to be 2.6 percent, and inflation in 2026 is expected to be 2.3 percent. The average interest rate in the fourth quarter of 2025 is expected to be 4.0/4.25 percent.
This forecast was formulated under the assumption that the war’s direct impact on the economy will continue until the end of the first quarter of 2025. This assumption reflects a moderate intensity of the fighting in early 2025. The downward risk to the forecast has decreased in view of geopolitical developments in the fourth quarter of 2024, particularly the relative calm along the Lebanese front, such that the probability we attribute to security scenarios with more serious economic implications has declined. However, this risk remains much higher than normal. As such, the level of uncertainty surrounding the growth, inflation, interest rate, and government deficit forecasts, remains high.
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 January 5, 2025, prior to the decision on the interest rate made on January 6, 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.