The Bank of Israel (BOI) released its estimates for inflation and GDP in Israel in 2023. According to the forecast, GDP is expected to grow by 2.8 percent in 2023, and by 3.5 percent in 2024. The inflation rate in the coming four quarters (ending in the fourth quarter of 2023) is expected to be 3.0 percent. The inflation rate in 2024 is expected to be 2.0 percent. According to the forecast, the monetary interest rate is expected to average 4.0 percent in the fourth quarter of 2023.
A 3% rate of inflation is not bad – not great either. But most importantly, it is below the 5.3% inflation rate that Israel saw in 2022.
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The BOI said the inflation rate is expected to slow during the forecast period due to more moderate demand, under the influence of restraining monetary policy in Israel and abroad, but also due to the continued moderation of supply-side pressures.
The upward revision of the inflation forecast for 2023, said the Bank of Israel, was mainly influenced by the depreciation of the shekel in terms of the nominal effective exchange rate, and by the upward revision of our assessments regarding the wage agreements expected in the public sector. In contrast, the Bank’s assessment is that the recent decline in oil prices will partly offset the effects of the exchange rate and wages.
As for the predicted rate of GDP, the BOI cited National Accounts data published since the previous forecast (for the period ending in the third quarter of 2022) that were slightly higher than expected. Therefore, the GDP level remains higher than the pre-crisis trend line. However, the Bank of Israel expects it to decline slightly to below the trend line later on. The expected slowdown in growth is due to an expected moderation in the growth of world trade (and therefore of Israeli exports), as well as an increase in the real interest rate in Israel within the forecast period. The forecast regarding growth in 2022 was revised slightly upward due to the effect of final third quarter data.
The Bank of Israel also said that the interest rate is expected to average 4.0 percent in the fourth quarter of 2023. Within the forecast range, it expects that the BOI rate will increase by 0.5 percentage points beyond the assessment in the previous forecast, to 4 percent at the end of 2023, and that this will help inflation converge to the midpoint of the target range. This assessment, said the Bank, reflects a deepening of monetary restraint with an increase in the interest rate from its current level, in view of the upward revision of the inflation expectation and the high level of activity.
On Monday the BOPI raised the rate by 0.5 percentage points to 3.75%.
The Bank of Israel Research Department compiles a staff forecast of macroeconomic developments on a quarterly basis. The staff forecast is based on several models, various data sources, and assessments based on economists’ judgment. The Bank’s DSGE (Dynamic Stochastic General Equilibrium) model developed in the Research Department—a structural model based on microeconomic foundations—plays a primary role in formulating the macroeconomic forecast. 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”.
