After the announcement of the decision by the Bank of Israel Monetary Committee to raise the central bank’s interest rate to 4.5% and the warning by the bank’s Research Department of the possible consequences of advancing the government’s planned changes in the legal system, Governor of the Bank of Israel Amir Yaron gave television interviews yesterday evening in which he responded to criticism of him by politicians and promised to keep fighting inflation even if this meant raising interest rates further.
On the overhaul of the judicial system, Yaron told Kan 11 that "the uncertainty surrounding this event is very great; we are calibrating it to numbers that are similar in nature to the dot.com event." Yaron was referring to the fallout from the collapse in value of technology companies in 2000.
The Bank of Israel Research Department presented two forecasts of the possible effect of the judicial system legislation. "If this event is very, very temporary, it will end with a hit of 0.8% to GDP annually - about NIS 14 billion," Yaron said. "If it continues over time, the damage could reach NIS 50 billion annually in the next three years."
Yaron added: "We have to be alert to the fact that in almost any scenario, the damage is significant. It’s very hard to estimate whether the effect is already being felt. Uncertainty is not good, and so the earlier a solution is reached and the broader the agreement on it, the more the potential damage will fade."
Responding to remarks by Minister of Communications Shlomo Karhi, who tweeted after the announcement of the interest rate hike: "The governor could be replaced by a robot," and accused him of being out of touch with the people, Yaron said that Prime Minister Benjamin Netanyahu had spoken of the importance of the Bank of Israel’s independence. "This is by now obvious to everyone; perhaps it’s not obvious to the minister."
Yaron was asked in his interview on Kan 11 about the controversial interview he gave to CNN’s Richard Quest a few weeks ago in which he criticized the judicial overhaul. "I give interviews in Israel and abroad, and it’s good that the world sees an independent central bank governor. It only strengthens the economy," he said.
On the high rate of inflation in Israel, currently running at 5.2% a year, Yaron said that the bank was determined to reduce it even at a painful price to the Israeli economy. On Channel 12 News, Yaron said, "The rate of inflation is moderating. It’s true that this is happening more slowly than we and the markets expected to see, but we are continuing with the process, and it’s a process that takes time."
Yesterday’s interest rate hike will add NIS 64 to the monthly repayment of an average mortgage. Within a year, the average mortgage repayment has jumped by NIS 1,030. Yaron told Channel 12 News: "We understand the citizens’ pain, but it has to be understood that inflation erodes the value of money and the value of their assets. It mainly harms the weak, and we are therefore determined to reduce it. If inflation takes root, the harm will be greater."
As for the future, Yaron said, "If we see clear moderation by the next interest rate rise, we may stop. If we don’t see that and inflation continues to be very sticky, we may have to continue the process for longer. I hope that we are getting close to the end of the process. The interest rate tool is working in the US and in the euro bloc, and it will work in Israel too."
Published by Globes, Israel business news - en.globes.co.il - on April 4, 2023.
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