Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in September 2025 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] According to the forecast, in a scenario in which the fighting in Gaza comes to an end in the first quarter of 2026, GDP is expected to grow by 2.5 percent in 2025, and by 4.7 percent in 2026. The inflation rate in the coming four quarters (ending in the third quarter of 2026) is expected to be 2.4 percent, inflation in 2025 is expected to be 3.0 percent, and inflation in 2026 is expected to be 2.2 percent. The average interest rate in the third quarter of 2026 is expected to be 3.75 percent.
The forecast under this scenario was formulated following the broad mobilization of reserve soldiers and the beginning of a significant land operation in the Gaza Strip, and under the assumption that the fighting would come to an end in the first quarter of 2026. Such developments will have a marked effect on the forecast—strengthening the restrictions on the supply side, particularly due to the broad mobilization of military reserves, and increasing economic uncertainty, thereby contributing to a lower growth forecast and increasing the inflation forecast and the expected interest rate path relative to the July forecast. In parallel, developments have led to an increase in the forecast deficit in the state budget, due to increased government expenses resulting from the extension of the war. However, there is great uncertainty regarding the development of the geopolitical situation, as detailed in the section on risks to the forecast. The extension of the fighting in Gaza for a more prolonged period will be reflected in lower growth, higher inflation and interest rate paths, an expansion of the deficit in the state budget, and a deepening of economic risks. In contrast, if the talks currently taking place result in a ceasefire agreement and a rapid end to the war, it will ease the supply constraints in the economy, which will support expanded activity.
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 September 28, 2025, prior to the decision on the interest rate made on September 29, 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.