Bank of Israel Governor Prof. Amir Yaron held a press conference after the Monetary Committee announced this afternoon that it would leave the interest rate unchanged at 4.5%. Yaron said: “Since October 7, we have been in the midst of a protracted war. Geopolitical uncertainty has increased and the risk premium for the economy has risen. However, from a macro perspective, the Israeli economy continues to demonstrate resilience in dealing with the challenges of the period.
“The war has significant economic implications, affecting the Israeli economy. Despite the improvement we have seen in the economic recovery, there is still a long way to go before a full return to normal activity. The Bank of Israel continues to work to help the Israeli economy and the public get through this difficult period. Among other things, since the outbreak of the war, we have taken a number of steps aimed at ensuring the orderly functioning of the markets and helping specific population groups that have been negatively affected.
The Committee’s discussions analyzed the impact of the war on various aspects of economic activity and inflation. In addition to the increasing geopolitical uncertainty, monetary policy focuses on stabilizing and reducing uncertainty in markets, in addition to price stability and supporting economic activity. The path of interest rates will continue to be determined by the convergence of inflation to its target, the continued stability of financial markets, economic activity, and fiscal policy.
Inflation at the top of the range
“Although the inflation rate in Israel is within the target range, it is still at the top of the range, and there was some increase in the inflation environment in the last quarter. Remember that inflation is a process that negatively affects the economy and growth, and makes financial behavior difficult for the economy in general, and especially for the weaker population groups. Therefore, we continue to adopt a monetary policy that supports the moderation of inflation,” Yaron added.
“The consumer price indices, excluding tax changes, energy, and fruits and vegetables, continue to hover around the midpoint of the target range. However, inflation expectations for the various bands – which are an important component of our analysis to examine the monetary process – are at the upper end of the target, and some have even been above it in recent months. I note that the forecasts also include expected tax increases. The Committee’s assessment sees among the factors that could lead to an increase in the inflationary environment: the continuation of the war and its impact on economic activity, including the depreciation of the shekel, the activity of the housing market and restrictions on it, financial developments, and global oil prices.
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Yaron continued that the analysis of real activity in the economy indicates that “the overall level of activity in the economy remains below what prevailed immediately before the war. Since the previous interest rate decision, the strong recovery in economic activity that we witnessed in the first quarter of the year has slowed. Based on current indicators, the rate of economic growth has slowed in the second quarter, and supply constraints are weighing on the convergence of economic activity to the pre-war trend. The growth rate of private consumption, which recovered in the first quarter of 2024, also declined slightly in the second quarter, as reflected in the credit card spending data.
“However, we see an encouraging improvement in the amount of capital raised by startups in the second quarter, which is an important indicator in light of the importance of the high-tech industry to the Israeli economy.”
Housing Market Developments
“We are closely following developments in the housing market. In recent months, housing prices have risen significantly, after falling in 2023. In May, the volume of mortgages increased compared to previous months, to NIS 7.8 billion.
“In parallel with the increase in demand, the construction industry is still not operating at full capacity and is mainly affected by a shortage of workers; the return of construction sites to full activity is slow. Since the main bottleneck on the supply side is the labor force constraint, it is important to continue to promote the process of bringing foreign workers from various countries into the construction industry. In addition, taking into account the security guidelines and restrictions, consideration should be given to maximizing the potential of Palestinian workers in the industry. In addition to maintaining activity in the short term, measures should also be taken to maintain a high supply of construction over time. As I have indicated in the past, this is key to adjusting housing prices.
Government budget
“The overall scope of the required budgetary adjustments is large, and therefore the early start of the budget formulation process in the Finance Ministry is a positive step,” Yaron said. “I emphasize that if decisions are made that entail additional permanent increases in the defense budget, further adjustments will have to be made accordingly. It is the government’s responsibility to take the necessary steps, even if some of them are not popular, to ensure economic stability and promote sustainable growth.”
“If the government implements only part of the required fiscal adjustments, postpones budget approval until 2025, and/or approves further increases in military and permanent expenditures, this will likely lead to a further increase in Israel’s risk premium. This will be the result of the perception in the markets that the debt-to-GDP ratio is on an uncontrolled path.”
During the press conference, Yaron was asked by Globes how he would explain to investors around the world the economic situation in Israel due to the impact of the war on macroeconomic data, along with the rise in Israel’s credit default swap (CDS) and the credit yield differential between Israel and the United States. He said: “When I travel around the world, I invest a lot of input into the budget adjustments we are making in Israel and focus on the major adjustments we will make in the 2025 budget, as long as the war continues. At the same time, I emphasize that the economy in Israel is still growing and that high-tech fundraising is still on the rise.”
This article was published in Globes, Israeli Business News – en.globes.co.il – on July 8, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
