This document presents the forecast of macroeconomic developments compiled by the Bank of Israel Research Department in December 2016. The forecast was presented to the Monetary Committee on December 25, 2016, during its meeting prior to the decision on the Bank of Israel interest rate for January 2017. According to the staff forecast, gross domestic product (GDP) is projected to increase by 3.2 percent in 2017 and by 3.1 percent in 2018. The rate of inflation over the next year (ending in the fourth quarter of 2017) is expected to be 1.0 percent. The Bank of Israel interest rate is expected to remain at its current level of 0.1 percent in the first three quarters of 2017, and to increase gradually from the fourth quarter of 2017.
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.[1] 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.[2] The model provides a framework for analyzing the forces which have an effect on the economy, and allows the integration of information from various sources into a macroeconomic forecast for real and nominal variables, with an internally consistent "economic story".
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[1] An explanation of the staff macroeconomic forecast, and an overview of the models on which it is based, can be found in Inflation Report 31 for the second quarter of 2010, section 3-C.
[2] A Discussion Paper on the model is available on the Bank of Israel website, under the title: “MOISE: A DSGE Model for the Israeli Economy,” Discussion Paper No. 2012.06.