Following yesterday’s decision by the Bank of Israel’s Monetary Committee to leave the bank’s key interest rate unchanged at 4.5%, Bank of Israel Governor Amir Yaron explains the economic path that the State of Israel is currently following.
“Last year was full of challenges. The Israeli economy usually grows at about 4% annually. This time, we saw only slight growth (0.6% according to the bank’s estimates). In the previous year, growth was only 2%. We are seeing a cumulative hit, but we are also seeing The economy has improved even during this event, and our forecasts reflect that, despite supply constraints.
The risk premium in Israel has moderated recently. How much is this still a factor for you?
“We appreciate that even though the risk premium has fallen, which is of course a very good thing, it is still higher than the levels we knew before the war. For us, the risk premium is an indicator of the difficulties the economy is facing in sentiment and expectations. And in many other respects In forecasts, when we look at the debt ratio and economic growth, the risk premium reduces growth.
The price of the shekel has strengthened significantly and is far from its lowest level at the beginning of the war. Is pricing still at a risk premium?
“According to our models, without this event we would be in a very different place.”
Criticism of the budget
Yaron is in his second term as governor. In 2023, before the outbreak of war, there was speculation that the government would prefer to appoint another governor to replace him. In the end, the war changed everything, and it was decided to keep it for another period, because of the credibility it projects in global markets.
Regarding the current state budget, the governor gave his approval to the budget framework that was ultimately approved by the government and is now under discussion in the Knesset. However, the Central Bank expects that the fiscal deficit target, which was set at 4.4% of GDP, will not be achieved, and that the deficit will reach 4.7% at the end of the year.
“I have said in the past that the budget framework is good. I believe that adjustments have been made too broadly. This imposes a burden on households and businesses. We recommended these adjustments so that the debt-to-GDP ratio projections do not change.” “He is proven wrong, and then market confidence is maintained and strengthened over time,” says Yaron on the subject.
When you look at the budget, what will you change?
“I would remove the negative incentives to go out to work, for example. This includes several elements that would encourage the ultra-Orthodox sector to go out to work. Some of them are on the income side, some of them are barriers like the core school curriculum, so they can earn decent money. “
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The Bank of Israel keeps interest rates unchanged and raises growth expectations
The public is now dealing with many austerity measures. Do you have ideas to make things easier by lowering interest rates?
“First of all, we understand the difficulty that households and businesses are facing. It is a question of everything coming together, and it certainly affects the public: the cost of living, the budget adjustments, the high interest rate environment.”
However, Yaron says, we must remember that the alternative is higher inflation that will ultimately hurt the weakest segments of the population more.
“The reality is that the interest rate is the right tool to deal with this challenge. In our headline scenario, there is too much uncertainty. We see inflation falling as we enter the second half of the year, and so we are thinking if we see further improvement in the risk premium and if Inflation surprised us in a positive way, we will be able to take that into account and on the other hand, if we see that inflation is flat, we will think in a different direction. We have to rely on the data and try in this reality to imagine the main scenario under which we act, but we have already seen that things can. That changes quickly “Big.”
What about banks? They are posting record profits thanks to high interest rates.
“All along we have led reforms to enhance competition in the system. The way to do that is through structural changes. We have introduced mortgage reform, for example, and the differential in this area has come down. There is the issue of pass-through.” Through deposits, which is not enough.” Yaron says the central bank’s understanding is that it is better not to interfere in the market mechanism, but insists that it will not hesitate to take more significant steps if the measures proposed so far turn out to be fruitless.
Published by Globes, Israel Business News – en.globes.co.il – on January 7, 2025.
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