Debt fears top Bank of Israel’s concerns

At the press conference, which represents the issuance of the annual report of the Bank of Israel for the year 2024 last week, a segment was presented with special concern among the Central Bank officials. According to the numbers, the proportion of Israel will increase: the ratio of GDP in the medium term, and it can reach 72 % in the coming years. This is despite the need for fiscal policy, given the permanent growth in government spending due to the war.

In normal times, in a week before the interest rate decision, the Governor of the Bank of Israel will talk about inflation and moderate inflation. This time, however, the ruler, Amir Yaron, mainly focused on the budget approved last week, or to be more accurate, as it was missing from the budget. He said that the measures made by the government, “are not sufficient to ensure a decrease in Israel's debts,” and “the installation of the amendments made do not contribute to the economy's ability to deal with the damage caused by war, or with the potential of growth when it ends.”

In other words, the government has not implemented measures that could improve the financial deficit, which is 4.9 % of GDP, and Israel's credibility in the markets. The central bank’s report called for the implementation of such measures, heading the encouragement of Hareedim and the Arabs to join the labor market, and avoid transfers that contradict this goal.

The Bank of Israel states that it will be difficult to reduce the conditions in the economy through tax cuts, and indicates the fact that although the ratio of GDP is expected to decrease in 2026, Israel will remain on the “debt ratio curve: gross domestic product”. The reservation of this risk is the sudden rise in tax revenues. If this trend continues, Israel will be able to avoid losing control of the debt rate: gross domestic product.

On the side of the risks, the Bank of Israel warns of a decrease in special consumption, which is vulnerable to slowing tax revenues. Another fear that arises from the ruler's statements, which is high -risk, especially in light of the fact that it meets with representatives about international credit rating agencies. Yaron referred to the explosive call against Hezbollah in Lebanon in September last year as a point where Israel began Premium, as it was explicit in swaping of failure to pay on government bonds for a period of 5 years, to decline, but the renewed fighting on the various fronts has increased again recently.

What did Yaron say about inflation?

On this Monday, April 7, the Banque Israel Monetary Committee will publish a decision of the interest rate. The market focus will be on the accompanying economic expectations, as the interest rate is expected to be left unchanged, by 4.5 %. The expectations of the former central bank assumed an end to the war this year, which was a change in the past month.

Analysts did not find the expectations of moderate inflation and reaching the target range 1-3 % in the coming months, i.e. Echo in Yaron's words. He emphasized that he expected to reduce the interest rate in the second half of the year.

It was published by Globes, Israel Business News – En.globes.co.il – on April 2, 2025.

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