BoI Governor: No rate cut until second half 2025

Bank of Israel Governor Prof. Amir Yaron told Globes that any interest rate cut may not come before the second half of 2025, if inflation moderates.

The Monetary Committee of the Bank of Israel decided yesterday to keep the interest rate unchanged at 4.5%. The absence of a 2025 budget, the fiscal deficit, the uncertainty about the war in the south and north, and despite all this steady inflation, were factors that convinced the Bank of Israel to keep the interest rate at 4.5% for the fifth consecutive meeting.

“In the baseline scenario that I’m talking about, I see a lot of supply constraints, which are expected to ease in mid-2025. That’s why we think the interest rate is at a fairly restrictive level. It’s going to take some time, even when you look at the wage increases and the tight labor market, which are all expected to end in the middle of next year. Again, we’re acting on the data reflected from the markets, so there could be changes and we will of course act accordingly,” Yaron told Globes. Yaron believes that inflation will also rise in the first quarter of 2025 to above the price stability target.

The governor recently criticised the government’s conduct regarding the approval of the 2025 budget. He said: “There is value in passing the budget on time, and therefore it should be passed as soon as possible with the necessary amendments.”

Asked by Globes about the date of his last meeting with Prime Minister Benjamin Netanyahu, Yaron said: “I will not go into my discussions and agendas with the prime minister. It is important to understand that there is, first and foremost, a great deal of uncertainty in Israel, especially regarding financial matters. This can be reduced by creating certainty and credibility on the financial level, and that means passing the 2025 budget.”

A proposal was recently made to prepare a two-year budget for the distribution of the timetable, what do you think about that?

“We are talking about a process that is expected to be long, especially if it is carried out in a serious and organized manner. Israel is in a state of war and in a situation where a two-year budget means going for a long time without an approved budget, and again, as I said, time frames have a great value here. Moreover, we basically want to maintain flexibility for 2026, so that if we need to make additional adjustments in the future budget, we can do so.”

In his annual budget, Yaron stresses that the top priority is “we want to see the required changes by 2025.”

Yaron has expressed his opinion on fiscal policy several times, and sent a letter to Netanyahu saying that adjustments worth about NIS 30 billion should be made to the future budget. Yaron wrote: “In light of the extent of the required adjustments and the structure of the budget, in addition to cutting spending, significant steps will be needed to increase revenues. It is also important to include structural changes that generate growth that supports fiscal policy. I would like to emphasize that implementing these adjustments is vital to maintaining a sustainable debt-to-GDP ratio and preserving Israel’s financial credibility.”

You attended the Federal Reserve’s central bankers’ conference in Jackson Hole last weekend. Were you asked about the problematic situation in Israel?

“I attended the conference, and there is certainly interest in the economic situation in Israel. Since the beginning of the war, with all the governors and senior economic figures, I have been involved in presenting the strength and resilience of the Israeli economy, as well as the measures we are taking in order to return to the path of growth.”

But Yaron stated frankly: “We are also describing the event that we are living through, which is different from previous events, where we showed dynamism and a rapid economic recovery. And here there could certainly be lasting effects.”

This article was published in Globes, Israeli Business News – en.globes.co.il – on August 29, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.