Tomorrow (Monday) the Bank of Israel is due to announce its next interest rate decision. At present, the consensus among the analysts is that we shall see a further interest rate rise, of 0.25%, or "at least 0.25%", to 4.75%. In its last interest rate announcement, in April, the Bank of Israel estimated that its interest rate would reach 4.75% only at the end of 2023, but the assumption is that the central bank will have to reach that level this week, mainly because of the figures released by the Central Bureau of Statistics last week showing annual inflation running at 5%.
At the same time, the Bank of Israel has stressed that despite the expectation of a decline in tax revenues in the coming year, a cut in the growth forecast, and the distribution of funds to coalition parties last week, it is still not worried about the growing fiscal deficit. The bank’s Research Department says that the government’s policy is still considered contractionary: "The deficit target was legislated last year and it does not appear that Israel will exceed it. This is so even if there is some decline in revenues, because of changes in economic activity."
On the other hand, the Bank of Israel is naturally not rejoicing at the showering of money on the coalition parties, much of which will not contribute to economic growth. The warning issued by the Ministry of Finance Budgets Division last week, that an unchecked distribution to the coalition parties is liable to harm Israel’s GDP in the future, mainly echoed previous reports by the central bank, which, for example, stressed the importance of integrating the haredi population into the labor market.
The state budget that will be approved this week is built on the basic assumption of a very low fiscal deficit, of 0.8-0.9% of GDP, in 2023-2024. According to the latest forecast by the Ministry of Finance, the deficit will grow to 1.1% this year and to 1.35% at the end of next year. This is still low in comparison with market expectations. The consensus among the analysts is that the deficit will reach 3% of GDP.
Mizrahi Tefahot chief economist Ronen Menachem says that in the coming months the Bank of Israel will have to on the alert as far as the fiscal deficit is concerned. "The government is meant to pass the state budget for 2023-2024 by the end of the month, and thus end of the transition period in which government spending has been restricted to one twelfth per month of the existing budget. The more that a larger breach of the deficit target starts to emerge, the more difficult it will become for the Bank of Israel to cut interest rates," he says.
Minister of Finance Bezalel Smotrich, at any rate, is sure that the alarm is overdone. "The budget is still balanced, it abides by the spending ceiling we set for ourselves, and we have not breached the budget framework and are managing to maintain the framework we set," he says. "The funds for the coalition parties are not greatly in excess of previous years, so that we are at the same order of size as far as that goes."
Published by Globes, Israel business news - en.globes.co.il - on May 21, 2023.
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