Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in July 2025 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] According to the forecast, GDP is expected to grow by 3.3 percent in 2025, and by 4.6 percent in 2026. The inflation rate in the coming four quarters (ending in the second quarter of 2026) is expected to be 2.2 percent, inflation in 2025 is expected to be 2.6 percent, and inflation in 2026 is expected to be 2.0 percent. The average interest rate in the second quarter of 2026 is expected to be 3.75 percent.
This forecast was formulated after the announcement of the ceasefire at the end of Operation Rising Lion, and under the assumption that it will be maintained. Operation Rising Lion has an impact on the forecast, both due to the economic impact while it was taking place and in relation to the forward-looking forecast. With regard to the fighting in Gaza, the forecast was formulated under the assumption that the ceasefire agreement currently being discussed will lead to a situation in which during the forecast horizon, beginning in July 2025, there will be no intense fighting in Gaza. Compared to the April forecast, the current forecast includes some moderation of the impact of the tariffs announced by the United States in April. The forecast is characterized by an exceptionally high level of uncertainty, with positive and negative possibilities both in the geopolitical sphere and with regard to the American government’s tariff policy. At this stage, there is also significant uncertainty regarding the government’s decisions concerning the state budgets for 2025 and 2026, and the forecast is based on assessments and working assumptions formulated by the Research Department regarding decisions that will be made.
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. 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 July 6, 2025, prior to the decision on the interest rate made on July 7, 2025.