BoI Governor: We must conduct responsible economic policy

By Investor Empires On Oct 9, 2024

The Governor of the Bank of Israel, Professor Amir Yaron, opened his remarks at the press conference that followed the decision of the Monetary Committee, which he chairs, to leave the interest rate unchanged at 4.5% by saying, “The State of Israel is in a constant war, and recently the intensity of the fighting on the northern front has increased. And it still continues.” The state of geopolitical uncertainty is high. As we emphasized, the war has major economic repercussions, and the path ahead of us to full routine activity still faces notable economic challenges, and dealing with them requires adopting a responsible economic, fiscal and monetary policy, to ensure continued financial stability and economic growth in the future.

He continued: “In contrast to the global trend, the inflation environment in Israel has been on an upward trend in recent months. The inflation rate is above the upper limit of the target range and the year-on-year inflation rate continued to rise in August.” The increase in the inflation rate occurs across a wide range of components, both tradable and non-tradable, and inflation expectations, which constitute an important component of our analysis in studying the monetary process, reflect a further increase in the expected inflation rate in the year. The beginning of 2025, and moderation towards the target only in the second half of the year. In the committee’s assessment, factors that may lead to a further increase in the inflation environment include the continuation of the war and its impact on economic activity, including the depreciation of the shekel, housing market activity and restrictions, financial developments, and global oil prices.

“An analysis of real economic activity shows that the economy has not yet returned to the level of activity that prevailed immediately before the war. The economy’s growth in the second quarter was low, and was revised slightly downwards by the Central Bureau of Statistics. Accordingly, the GDP is 3.3% under Long-term trend line However, based on current indicators, there was a moderate recovery in economic activity at the beginning of the third quarter, and the growth rate of private consumption, which was moderate in the second quarter of 2024, is showing slight signs of recovery, as reflected in the increase in… Nominal spending on credit cards. In addition, exports of high-tech services and fundraising by high-tech companies and the Purchasing Managers’ Index also point to a trend of improvement in business activity. The trends survey for September reflects a mixed trend among businesses, especially against the backdrop of the deteriorating security situation. In the north.

Yaron also spoke about the recent downgrade of Israel’s rating by international rating agencies. He said: “It is important to pay attention and take seriously the ratings of the rating agencies, because they reflect the challenges and risks facing the Israeli economy as seen by the world. The credit rating agencies emphasize the impact of geopolitical reality, but also the importance of fiscal policy behavior, focusing on the importance of the future policy framework, The rating agencies explained that the decision to lower Israel’s rating was taken for various reasons, which primarily include geopolitical uncertainty, the increase in war tensions on the northern front, and the decline in the prospects for a ceasefire in Gaza. In addition, Moody’s also emphasized: the budget approval process, and capacity On making the required financial adjustments, the difficulty of recruiting extremists – Orthodoxy, and the processes of change in the judicial system. It is important to emphasize, as the agencies also did, that the State of Israel has experienced geopolitical crises in the past, including in periods when debt-to-GDP ratios were poor. The total is much higher, and there was no delay in repaying Israel’s debts. Confidence in international markets and institutions is essential to the stability of the Israeli economy. To ensure continued confidence in the Israeli economy, it is important for the government to work to address the economic issues raised in the country Reports, which are largely consistent with recommendations put forward by the Bank of Israel in the past. “Israel.”

“The updated macroeconomic forecast published by the Research Department today includes the latest developments. The Ministry assumes that the war, which has expanded on the Northern Front as well, will continue with high intensity at the beginning of 2025 as well.

“In the base scenario, the ministry’s assessment is that GDP is expected to grow by 0.5% in 2024 and by 3.8% in 2025. This is a lower growth rate than the July forecast by one percentage point in 2024 and by 0.4% points in 2025.” The economy is far from the growth trend in recent years, and inflation rate expectations have been increased from previous expectations. It is assumed that annual inflation is expected to reach 3.8% at the end of 2024 and 2.8% in 2025. The government budget deficit is expected to reach 7.2%. of GDP in 2024, in light of growing war costs and partially shifted US private aid flows to 2025 and beyond, the deficit is expected to rise in 2025 and public debt is expected to reach 4.9% of GDP, although Assuming fiscal adjustments of a permanent nature, with a total value of NIS 30 billion, public debt is expected to reach a level of approximately 68% of GDP in 2024, and approximately 69% of GDP in 2025.

Regarding the budget, he said: “The state budget for 2025 represents a challenge, and progress in its formulation is certainly positive, in light of the scope of the required financial adjustments. Approving a responsible budget for 2025 is an essential element in strengthening the international coalition.” Market confidence and maintaining the strength of the economy. It is important that the government and the Knesset approve significant fiscal adjustments of a permanent nature, as opposed to the continuing increase in defense expenditures, in order to allow the debt-to-GDP ratio to stabilize back to decline over the next two years, and in this regard, the steps presented by the Minister of Finance It is moving in the right direction, and from the perspective of budget composition, the amendments should include a wide segment of the population. It is important for the government to prioritize growth-supporting expenditures, reduce negative incentives to go out to work, and eliminate non-essential ministries.

Published by Globes, Israel Business News – en.globes.co.il – on October 9, 2024.