Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in January 2026 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] In our assessment, GDP grew by 2.8 percent in 2025, and is expected to grow by 5.2 percent in 2026 and 4.3 percent in 2027. The inflation rate in the coming four quarters (ending in the fourth quarter of 2026) is expected to be 1.7 percent, and inflation in 2027 is expected to be 2.0 percent. The average interest rate in the fourth quarter of 2026 is expected to be 3.5 percent. In 2027, the deficit is expected to decline to 3.6 percent of GDP, and the debt to GDP ratio is expected to be 68.5 percent.
The forecast was formulated following the October 2025 ceasefire, against the background of an economy featuring excess demand and a tight labor market. The ceasefire that took hold earlier than assumed in the September 2025 forecast led to an earlier easing of supply constraints, mainly thanks to the release of reservists and their return to employment in the business sector. The current forecast is based on the assumption that the relative calm on the various fronts will continued. However, our assessment is that there are still supply constraints, and that these will ease only gradually, thanks to a continued gradual increase in the participation rate of young people following military service and the continued increase in the number of foreign workers. However, even at the end of the forecast horizon at the end of 2027, the number of workers is expected to remain lower than the level derived from the prewar trend, due to a higher volume of reserve duty than before, some of those wounded in the war remaining out of the labor market, and a negative migration balance. The ceasefire and the lower geopolitical uncertainty support an expansion of economic activity, with no signs of unusual excess demand. Investments are expected to grow rapidly in response to the shortage of manpower, compensating somewhat for the years in which investment moderated. Imports and exports are expected to expand more rapidly than the pace of GDP growth, and in our assessment, the decline in surplus exports observed during 2025 will moderate thanks to the easing of supply constraints.
The easing of supply constraints, the decline in defense expenditures and the decline in Israel’s risk premium, as well as the appreciation of the shekel, are contributing to the moderation of the inflation environment, which is expected to become entrenched around the midpoint of the target range, and support the process of lowering the interest rate that began in November 2025.
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 4, 2026, prior to the decision on the interest rate made on January 5, 2026.
[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.