Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in July 2026 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] According to the baseline scenario, GDP is expected to grow by 4.0 percent in 2026 and by 5.5 percent in 2027. The inflation rate in the coming four quarters (ending in the second quarter of 2027) is expected to be 1.8 percent. Annual inflation in 2026 is expected to be 1.8 percent. The average interest rate in the second quarter of 2027 is expected to be 3.0 percent. If the defense budget is not expanded beyond the reserve allocated in the State budget, the state budget deficit is expected to be 4.9 percent of GDP in 2026, and 4.2 percent of GDP in 2027. The debt to GDP ratio is expected to stabilize at about 69 percent during these years.
The forecast is based on the working assumption that the intensity of the fighting in Lebanon will decline in a way that somewhat eases the supply constraints in the economy. In addition, we assume that there will be no additional fighting with Iran during the forecast horizon. However the geopolitical environment is expected to remain tense, so the forecast continues to reflect the need for preparedness should there be an additional round of fighting. Another assumption underpinning the forecast is that global energy prices, which have fallen in view of the agreement, will remain in the current environment throughout the forecast horizon. With regard to the state budget, the working assumption is that the defense budget will not be increased in 2026 beyond the reserves already set aside in the budget.
On the basis of these assumptions, the forecast reflects continued convergence of GDP toward the trend, supported by continued easing of the supply constraints with the release of reservists and the continued increase in the number of foreign workers. However, even at the end of the forecast horizon (end of 2027), GDP is expected to remain below the trend, since the supply of workers is still expected to be lower than the level derived from the prewar trend. In parallel, the easing of supply constraints, the declines in oil prices and in Israel’s risk premium, and the appreciation of the shekel contribute to 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.
The forecast
The Bank of Israel Research Department compiles a quarterly 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) models—structural models developed in the Research Department and based on microeconomic foundations—play a prime role in formulating the macroeconomic forecast. The models provide a framework for analyzing the forces that have an effect on the economy, and allow information from various sources to be combined into a macroeconomic forecast of real and nominal variables, with an internally consistent “economic story”. The models also help analyze scenarios and policy alternatives, and thereby support the formulation of policy under uncertain conditions.
[1] The forecast was presented to the Bank of Israel Monetary Committee on July 5, 2026, prior to the decision on the interest rate made on July 6, 2026.