The Bank of Israel Research Department published its January 2026 staff macroeconomic forecast, estimating GDP growth of 2.8% in 2025 and projecting 5.2% growth in 2026 and 4.3% in 2027. Inflation is forecast at 1.7% over the four quarters ending in the fourth quarter of 2026 and 2.0% in 2027, while the Bank of Israel interest rate is expected to average 3.5% in the fourth quarter of 2026; the government deficit is projected at 3.9% of GDP in 2026 and 3.6% in 2027, with public debt at 68.5% of GDP in both years. The baseline assumes the October 2025 ceasefire holds and relative calm continues, bringing forward an easing of supply constraints compared with the September 2025 forecast, mainly through the release of reservists back into the business sector. Labour supply constraints are still expected to ease only gradually and employment is projected to remain below the level implied by the prewar trend through end-2027 due to higher reserve duty, some wounded remaining out of the labour market, and a negative migration balance; investment is expected to grow rapidly in response to manpower shortages. Moderating inflation pressures are linked to easing constraints, lower defence spending, a lower risk premium and shekel appreciation, a decline in oil prices (Brent at USD 61 per barrel versus USD 68 at the time of the September forecast), and subdued inflation abroad; the Research Department’s 1.7% inflation forecast is above capital-market expectations (1.4%) and below private forecasters (2.0%), while all three sources point to a 3.5% interest rate. On fiscal assumptions, 2026 begins with an interim budget expected to remain in place until March, with the forecast assuming the budget will be approved by the end of the first quarter without significant changes relative to the framework already approved by the government; without tax increases or expenditure reductions, the debt-to-GDP ratio is not expected to decline. Key risks highlighted include demand growing faster than expected in a tight labour market, renewed escalation in conflict, and uncertainty around potential early elections, alongside upside scenarios linked to a diplomatic breakthrough.
Bank of Israel 2026-01-05
Bank of Israel staff forecast projects 5.2% GDP growth in 2026 with inflation at 1.7% and the policy rate at 3.5% in Q4 2026
The Bank of Israel Research Department's January 2026 macroeconomic forecast projects GDP growth of 5.2% in 2026 and 4.3% in 2027, with inflation at 1.7% and 2.0% respectively, and an interest rate averaging 3.5% in late 2026. The forecast assumes a stable ceasefire, gradual easing of labour constraints, and highlights risks such as potential conflict escalation and early elections.