Bank of Israel Governor Prof. Amir Yaron has told "Globes" that any interest rate cut might not be until the second half of 2025, if inflation moderates.
The Bank of Israel Monetary Committee decided yesterday to keep the rate unchanged at 4.5%. The absence of a 2025 budget, the state of the fiscal deficit, the uncertainties over the war in both the south and north and despite all this sticky inflation were factors persuading the Bank of Israel to leave the rate at 4.5% for the fifth consecutive meeting.
Yaron told "Globes", "In the basic scenario that I am talking about, I see a lot of supply restrictions, which are expected to moderate in the middle of 2025. That's why we believe that the interest rate is at a sufficiently restraining level. It will take time, even when you look at the wage increases and the tight labor market, all of which are expected to end in the middle of next year. Again, we are acting according to the data reflected from the markets, so there may be changes and we will of course act accordingly." Yaron believes that inflation will also rise in the first quarter of 2025 to above the price stability target.
The Governor recently criticized the government's conduct on the passage of the 2025 budget. "There is value in passing the budget on time, therefore it should be passed as quickly as possible with the necessary adjustments," he said.
Asked by "Globes" when he last met with Prime Minister Benjamin Netanyahu, Yaron said, "I am not going to go into my discussions and schedules with the prime minister. What is important to understand is that first of all there is great uncertainty in Israel, especially on fiscal matters. This can be reduced by creating certainty and credibility at the fiscal level and that means passing the 2025 budget."
A proposal was recently raised to prepare a two-year budget in order to space out the schedule. What is your opinion on that?
"We are taking about a process that is expected to be long, especially if it is done in a serious and organized way. Israel is at war and in a situation where a two-year budget would mean going for a long period without an approved budget, and so again, as I have said, time frameworks have major value here. On top of that, fundamentally, we want to maintain flexibility for 2026, so that if we need to make additional adjustments in the future budget, we can do so."
A one-year budget emphasizes Yaron is the top priority. He stresses, "We want to see the required adjustments already in 2025."
Yaron has already expressed himself on fiscal policy several times and has sent a letter to Netanyahu saying that adjustments worth about NIS 30 billion must be made to the future budget. Yaron wrote, "In the light of the scale of the require adjustments and the structure of the budget, beyond cutting expenditure, significant steps will be required to increase revenues. It is also important to include structural changes that generate growth supportive of the fiscal policy. I would emphasize that carrying out these adjustments is vital to preserving a sustainable debt to GDP ratio and to preserving Israel’s fiscal credibility."
You were at the US Federal Reserve Bank's conference of central bank governors in Jackson Hole over last weekend. Were you asked about the problematic situation in Israel?
"I was at the conference and of course there is interest in Israel's economic situation. Since the beginning of the war and with all the governors and senior economic figures, I am engaged in presenting the strength and resilience of the Israeli economy as well as the measures we are taking in order to return to our path of growth."
However, Yaron stated candidly, "We also describe the event we are in, an event different from previous events, in which we have shown dynamism and rapid economic recovery. Here there can definitely be lasting effects."
Published by Globes, Israel business news - en.globes.co.il - on August 29, 2024.
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