Israel’s Economic Forecast: Public Debt Projection and Mstarttary Policy
Overview of Israeli Economic Predictions
On July 7, 2025, Bank of Israel Governor Amir Yaron announced concerning forecasts regarding the national economy. The central bank estimates that public debt will rise to 71% of GDP in 2026, significantly surpassing previous estimates. The research division of the Bank predicts three interest rate cuts within the upcoming year, projecting inflation to stabilize at 2.2% by mid-2026.
Inflation and Interest Rate Projections
According to the Bank of Israel, inflation has reached 3.1% as of May 2025, exceeding the government target. However, predictions indicate a decrease in inflation rates, with expectations that inflation will drop to 2.2% by the end of the second quarter in 2026, falling within the Bank’s target range of 1%-3%. Concurrently, the Bank forecasts that interest rates will settle at 3.75% by the third quarter of 2026, highlighting the anticipated mstarttary policy loosening over the next year.
Adjustments in Economic Growth Projections
The macroeconomic outlook has seen a slight reduction in the growth forecast for 2025, lowered from 3.5% to 3.3%. In contrast, the growth rate for 2026 has been revised upward from 4% to 4.6%. This upward adjustment is attributed, in part, to the aftermath of the conflict with Iran. The research unit of the Bank also revised the government budget deficit forecast for 2025, now expected to reach 4.9% of GDP, attributed to ongoing military engagements and political tensions, while acknowledging that increased tax revenues might help avoid surpassing the current deficit ceiling.
Implications of Rising Public Debt
The Bank of Israel anticipates that public debt will rise sharply, indicating that the debt-to-GDP ratio will reach 70% in 2025 and further escalate to 71% by 2026. This translates to a concerning increase of 3 percentage points from prior estimates, reflecting the financial strain posed by military operations and governmental spending related to national defense.
Focus on Security Stability
The Bank’s primary scenario hinges on a return to security stability, envisioning a cease-fire agreement that curtails further military actions. However, significant uncertainties remain, as highlighted in the report. The impact of military conflict, such as the recent operations in Gaza and the situation with Iran, pose risks to economic recovery, and any prolonged conflict could hinder growth and exacerbate the budget deficit.
Interest Rate Policy Decisions
Despite external pressures, the Bank of Israel’s mstarttary committee has decided to maintain the interest rate at 4.5% for the twelfth consecutive month. This decision, made amidst ongoing inflation concerns, reflects a cautious approach to mstarttary policy, highlighting the importance of addressing inflationary pressures before making further rate cuts.
Conclusion
As the Bank of Israel releases its updated macroeconomic forecasts, the emphasis remains on monitoring inflation trends and public debt levels closely. The landscape continues to be shaped by regional conflicts, requiring careful consideration of fiscal policy and economic strategies to navigate the challenges ahead.
Meta Description: Bank of Israel forecasts a rise in public debt to 71% of GDP by 2026, with predictions of three interest rate cuts and a stabilization of inflation at 2.2% next year.
Tags: Israel Economy, Public Debt, Bank of Israel, Inflation, Interest Rates, Economic Forecast, Amir Yaron, Mstarttary Policy