The Bank of Israel published its Research Department’s July 2025 staff forecast for growth, inflation and the policy rate. Under the baseline scenario, GDP is projected to expand by 3.3% in 2025 and 4.6% in 2026, with inflation expected at 2.2% over the four quarters ending in the second quarter of 2026 and the average policy rate projected at 3.75% in the second quarter of 2026. The forecast was formulated after the ceasefire at the end of Operation Rising Lion, assuming it is maintained, and also assumes that from July 2025 there will be no intense fighting in Gaza during the forecast horizon. Compared with April, it includes a moderated assessment of the impact of US tariffs announced in April and notes exceptionally high uncertainty, including around geopolitical developments, US tariff policy and the government’s 2025–2026 budget decisions. Fiscal projections put the deficit at 4.9% of GDP in 2025 and 4.2% in 2026, with debt at 70% and 71% of GDP respectively, incorporating initial assessments of costs from the campaign against Iran and additional costs not included in the original 2025 budget for continued fighting in Gaza; civilian costs of the Iran campaign are assessed at about NIS 10 billion, mostly paid via the Property Tax Fund and therefore excluded from the central government deficit but still requiring debt financing. Inflation is projected at 2.6% in 2025 and 2.0% in 2026, with short-term pressures from housing supply disruptions and rental demand partly offset by shekel appreciation, and easing labour market constraints assumed alongside reduced reserve mobilization. The interest rate path reflects a gradual reduction from the current level as inflation converges toward the midpoint of the target range; the Research Department notes its inflation forecast is slightly below private forecasters and above market-implied expectations, while the rate forecast is similar to both.

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