Bank of Israel Governor Amir Yaron indicated last night that it is still too early to talk about cutting interest rates in Israel. Speaking with Globes editor-in-chief Naama Sekuler on the opening evening of the Globes Israel Business Conference, Yaron estimated that the inflation rate would rise in the near term to 4%, due to the higher value-added tax rate. But it should go down after that. “Cutting the interest rate is like putting out a fire with gasoline,” Yaron said.
Yaron was asked about the economy’s growth rate, as estimates for next year by the Bank of Israel, the Finance Ministry, the International Monetary Fund and rating agencies vary widely. “It is good that there are certain differences in the growth expectations of the economy,” Yaron replied. “Forecasts have been made at different times. We are in a set of events with a high degree of uncertainty, and I would say that overall we saw an economy that took a pretty hard hit in the last quarter of 2023. We expect that this year.” It would end with 2% growth, and they were exactly right.
“Then there was a very significant recovery of the economy in the first quarter of 2024, but in the second quarter we stalled, and in the third quarter we had growth around our potential. The northern front happened mostly in the fourth quarter, so we have not yet seen what is happening in the north in This moment, but we are now witnessing a decline in the recruitment of reserve soldiers, and a return to activity in the north.
“Israel’s annual growth potential before the terrible event that befell us was 4%. So the growth rate in the third quarter of this year is close to our potential. The event in the north is a strong event. Our forecast is an end to the war.” War in the first quarter of 2025, and then tightening of routine security measures, we are still at the level of these expectations.
“Even though I said we would grow by 0.5% this year, that still leaves us with a very big gap compared to where we would have been without the war. There has been a recovery, and we believe it will continue.” Yaron added: “As long as we are making progress in reducing the war, we have a 3.6% gap in terms of where we would have been, and we must close this gap in the future.”
Israel’s inflation rate is perhaps more important than growth expectations, as interest rate decisions are derived from inflation. The interest rate gap between us and the world is widening. When will it get tight?
“Currently, inflation is at an annual rate of 3.5%. It is still set to rise, perhaps to more than 4%, in the first quarter of 2025, due to the rise in VAT, and also because there are still many supply constraints See All That’s in the construction sector, but it happens in many other areas. Let’s say there’s one orange in the entire economy, if you lower the interest rate, what will happen is that the price of the orange will go up, but it won’t be another orange, and that’s what we mean. With supply constraints, lowering interest rates at this stage is like putting out a fire with gasoline.
Regarding the interest gaps between Israel, the United States, and other markets where interest rates are moderate, Yaron explained that interest rate considerations in Israel are slightly different from those considered by the head of the US Federal Reserve. “The interest rate gaps of the last two years, whether due to constitutional changes or due to the war period, have not affected our exchange rates significantly. They are more related to geopolitical events. We are not bound to be completely in sync. It is true that the last economic cycle was similar in the two economies, but In the United States mortgages are offered at fixed interest rates. When interest rates rise, it affects the person who is buying a home. It also affects those who already have a mortgage that is partly at a variable interest rate, so our policy does not have to be in sync. Individually with our policy in the United States.
How do you see the 2025 budget?
“I want to distinguish between the budget framework and its composition. We have talked all along about the need to bring credibility to the markets and fiscal responsibility. An important and important step was taken when the government decided to set a budget with fiscal targets. I have spoken all year with investors, including at the Fund The International Monetary Fund, which I visited two weeks before the government approved the budget, told them: “They waited until the night the budget was approved, because there was a great deal of uncertainty, but in the end a very important step was taken in this area.”
However, Yaron criticized the budget composition. “Many other steps could have been taken in the direction of supporting growth. Certainly steps to reduce negative incentives, i.e. encouraging the Haredim to go out to work, on the issue of day care, welfare payments, etc. I would have provided greater support to infrastructure, to programs For five-point mathematics studies, there is a significant amount of coalition funds that could have been made to squeeze in much more.
How concerned should we be about a defense budget that looks set to grow for many years to come?
“The economy needs security. It is inseparable from the Israeli risk premium. But security also requires economics. It is a very delicate balance, and the two feed into each other. There is a Nagel committee to evaluate the security budget. With regard to the defense budget this framework is concerned, assuming we grow in line.” With our forecasts here, we can still announce to the markets that the debt-to-GDP ratio will rise to 69% in 2025 and then start to decline if and when the committee comes in with bigger budget demands, we should “We must signal to the markets that we have to make more adjustments (cut spending and increase taxes). This balance is important, and efforts must be made to find the really vital things, and also the places where the defense establishment can become more efficient.”
Will President Trump be good for the global economy or the Israeli economy?
“Since the Covid pandemic, we have witnessed an economic process of de-globalization. It started with the supply chain and the issue of surpluses. It was accompanied by geopolitical battles. It is possible that it will become more severe in response to the measures and we do not know what measures will be implemented, nor do we know if there will be Reciprocity or not. The process of globalization has brought wealth, prosperity and lower prices.
“Raising tariffs would hurt global trade, exports, and perhaps global welfare. There may be specific winners here and there, but it will lead to higher prices. Ten-year US Treasury bonds have fallen to 3.8%, and rates have fallen.” Interest on ten-year US Treasury bonds reached 3.8% and has now risen to the 4.2-4.3% area, and part of that is expectations of higher inflation.
You have recently raised your tone against banks and talked about surplus profits. What is your position on this and on imposing taxes on additional bank profits?
“It is not a question of for or against. It is a question that must be examined impartially. I want to take a step back and remind us that our banking system is very stable and strong. This is very important, that we do not get into a financial crisis spiral.” And the economic crisis is the fact that there is trust in this system is very important, it allows us and the system itself, as in the pandemic period, to provide assistance to people from the borders of the Gaza area, to detain soldiers, and they are still providing aid to the north. It is not a given that the banking system has such capital reserves.
“We have taken many steps to improve competition in many areas. In mortgage, the spreads are very small. The disadvantage is in credit for small and very small companies. We do not want to interfere here, but we are trying. We have improved the situation. We have introduced two new banks (One Zero And Esh Israel). We have connected fintech companies directly to our system, but that is not enough, we are working on more-term populist measures. We want to maintain stability, but on the other hand to build more competitive entities.
“We have come up with a plan for differential regulation of banks. A small bank will be able to specialize in one sector and will not have to bear all the costs. At the same time, financial awareness is very important. The public has come to have many possibilities today, for example, in Money market fund, you can get returns similar to interest rates at the Bank of Israel. It is very easy for a consumer with no financial knowledge to invest in a money market fund instead of leaving their money in a checking account.”
You travel the world a lot. Have you encountered anti-Semitism?
“People are very interested in Israel. We have a presence disproportionate to our size. This was true during the pandemic, and it is certainly true now. At a recent IMF event, a senior official there said to me: ‘I’m very glad you came, because you expressed Your point of view, and you did not hide it. This gives some indications of the complexity of the situation we are living in, and we must invest in growth engines, as the war is weighing on the economy and, of course, on morale, which is as difficult to measure as possible.
The Globes Business Conference in Israel is held in cooperation with Bank Hapoalim and Phoenix Holdings and is sponsored by El Al, Bezeq, Nespresso, Walt, Dell, Israel Medical Association, Energean, Jewish National Fund, BlackRock, Playtica, Meta, Strauss. A group, Bazan Group, and MSCI, with the participation of Mekorot, the Port of Ashdod, and the Israel Innovation Authority.
Published by Globes, Israel Business News – en.globes.co.il – on December 3, 2024.
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