At the end of the discussions of the Monetary Committee, and in line with expectations, the Bank of Israel kept its interest rate unchanged, at 4.5%, in the decision announced yesterday, for the third successive time. In its explanation of the decision, the bank said that the Monetary Committee estimated that there were several factors causing a risk of higher inflation: geopolitical developments and their impact on economic activity, depreciation of the shekel, supply constraints especially in construction and air travel, fiscal developments, and the price of oil.
Speaking to "Globes" after the announcement, Governor of the Bank of Israel Amir Yaron indicated that, despite rises in consumer prices and the fact that inflation expectations exceed the bank’s 1-3% target range, for the time being it will not raise its interest rate.
"The current interest rate level, even given the inflation environment, is contractionary. We are of course monitoring the situation closely, and make decisions in accordance with the data, but the interest rate level is certainly contractionary. It can be seen that although there is a certain rise in expectations, when you look a year ahead, inflation comes within the target," Yaron explained.
The forecast you published in April projected three interest rate cuts, while market expectations are for no interest rate cuts this year. Where are we going?
"You have to understand that the forecast released in April reflected the data before the committee at that time. Since then, we have experienced a rise in geopolitical uncertainty, a rise in the intensity of the fighting, certainly in the north, that is liable to lead to other pressures, and a rise in the inflation environment. All these things challenge the normalization of the interest rate.
"Even when we cut the interest rate in January we said that the interest rate trend would depend on the rate of inflation coming within the target range. There has now been a rise in all these parameters, and their direction challenges normalization of interest rates. On the other hand, it should be remembered that that forecast looked almost a year ahead, and things can change quickly. So at the moment we are working from one decision to the next, in a measured and cautious way, and in accordance with the data. The next forecast, due out in July, will contain more insights."
The Bank of Israel’s interest rate announcement mentioned the fiscal deficit, pointing out that the cumulative deficit continued to rise in the past twelve months because of the growth in government expenditure.
Are you worried about the fiscal deficit?
"It needs to be understood that some of the expenditure was more rapid than expected, while on the other hand revenues were also higher than expected. Putting these two elements together we see that, all in all, and it’s important for me to stress this, the deficit for 2024 is still more or less at the level we forecast. That means that it will rise higher than the levels we are seeing at the moment, but that towards the fourth quarter of 2024 it should fall back to the current environment of 6.5-7% (of GDP), as long as there is no material excess defense expenditure, that is, if they keep to the budget.
"For 2025, we assumed a deficit of around 4.5-5%. Other factors come into these estimates. Clearly, the longer the fighting continues and there’s a need for more budget expenditures, if some of them are diverted from 2024 or in general, there will be a need for further adjustments beyond what has been decided. At any rate, it’s clear that at this time the government has to do everything possible to limit the rise in debt and broadcast fiscal responsibility to the markets."
Do you think that the rise in VAT planned for 2025 should be brought forward?
"Again, the government must do everything possible to limit the rise in debt and broadcast to the markets fiscal responsibility. Any action that contributes to boosting fiscal credibility and reducing the risk premium will of course benefit the economy. So first and foremost the tax hikes as approved in the budget are highly important. But to the extent that there is unexpected growth in defense spending, other taxation measures, or bringing forward planned measures such as with VAT, should be considered. In any case, it’s important that the VAT measure should go ahead, even if it’s in 2025. At the moment there is not a small likelihood that, in the light of developments, further steps will be required."
Published by Globes, Israel business news - en.globes.co.il - on May 28, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.