As expected, the Bank of Israel Monetary Committee left the interest rate unchanged at 4.5%. In the decision the Bank of Israel made it clear that there will be no rate cuts until the second half of the year after the Consumer Price Index has moderated and fallen below an annual rate of 3%.
The Monetary Committee cited, "Several risks for a possible acceleration of inflation or for it not converging to the target range: geopolitical developments and their impact on economic activity, prolonged supply constraints, volatility of the shekel, and fiscal developments.
After the decision, Bank of Israel Governor Prof. Amir Yaron spoke to "Globes" about inflation, expectations for a rate cut, and the risks in the real estate market.
We see that the inflation forecast this year is moderating, and will already be within the target range in July. Why not cut the interest rate before the second half of the year?
Yaron says, "First of all, as we said, there is a lot of uncertainty. This is just one forecast, and we really estimate that if we see that geopolitical issues remain in the current environment, and that the excess demand over supply really moderates, we will see ourselves entering the inflation target range in the second half. We need to be convinced that this is not a temporary process, and therefore we are examining all this data in a comprehensive manner. This is the basic scenario.
"In the environment we are in, there are many scenarios that could accelerate inflation. If this happens, we will have to have a more restrictive interest rate environment over time. On the other hand, if we see that the processes are progressing at a faster pace, we will also be able to act accordingly."
On financing activities of contractors. Are you planning new restrictions?
"We are monitoring and analyzing developments in the real estate market on an ongoing and close basis. We have emphasized the issue to the banks, and we are in constant dialogue with them about the need for careful risk management during this period.
"On the issue of contractor loans and the need for banks to perform an up-to-date and detailed risk assessment on these issues, we are particularly concerned about transactions in which there is no full underwriting process for the borrower. The distinction is between, let's call it 20/80 loans, and balloon loans. With balloon loans, it is not clear that the client understands what kind of deal they are entering into with a view of several years ahead. We are of course examining the issue closely, and if it appears that the summaries are not sufficiently internalized, we have all the regulatory tools ready to be used on this issue."
What tools for example?
"I don't want to go into that at the moment. We are monitoring, we are in dialogue, and we have instructed the banks. The banks have taken certain steps, and we will of course examine whether this has been done adequately."
Assuming that the intense fighting in the war is behind us, what is the new focus of the Bank of Israel - growth or inflation?
"Inflation is at a rate of 3.8%. This is still a high range. We are aware that part of this is of course the tax increases, but we also see the processes in many places in the world - where inflation is relatively sticky. We also see the data from the last quarter, which shows very high domestic demand, which was actually met by an increase in imports. This is another indicator beyond the labor market that shows us the limitations of supply."
"The interest rate is restraining enough"
"Therefore," says Yaron, "how quickly will this balance between demand and supply be reached? We expect that in the second half we will be in a place where - we hope - the intensity of the war will more or less remain as it is. And in this scenario, we will be at a point where we can maybe begin starting with a cut or two in the interest rate. The interest rate right now, we believe, is restraining enough on the one hand to really lead inflation in this process to the target range, and on the other hand it still allows the economy to continue to recover."
Published by Globes, Israel business news - en.globes.co.il - on February 24, 2025.
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