Bank of Israel Governor Prof. Amir Yaron gave a press conference after the Monetary Committee announced this afternoon that it was leaving the interest rate unchanged at 4.5%. Yaron said, "Since October 7th we have been in the midst of a prolonged war. The geopolitical uncertainty has increased and the economy’s risk premium has risen. However, from a macro perspective, the Israeli economy continues to display resilience in dealing with the challenges of the period.
"The war has considerable economic ramifications, which impact on Israel’s economy. Notwithstanding the improvement seen in the economy’s recovery, there is still a very long way to go before fully returning to normal activity. The Bank of Israel continues working to help the Israeli economy and public get through this challenging period. Among other things, since the outbreak of the war, we have taken several steps with the goal of ensuring the orderly functioning of the markets and to assist specific population groups who have been adversely impacted.
The Committee’s discussions dealt with the analysis of the impact of the war on different aspects of economic activity, and inflation. Further to the increase in the geopolitical uncertainty, the monetary policy is focused on stabilizing and reducing the uncertainty in the markets, alongside price stability and support for economic activity. The interest rate path will continue to be determined in accordance with the convergence of inflation to its target, continued stability in financial markets, economic activity, and fiscal policy.
Inflation in upper part of range
Yaron added, "Although the inflation rate in Israel is within the target range, it continues to be in the upper part of the range, and there has been some increase in the inflation environment in the past quarter. Recall that inflation is a process that negatively impacts the economy and growth, and makes financial conduct difficult for the economy overall, and particularly for weaker population groups. Therefore, we continue to adopt monetary policy that supports the moderation of inflation.
"The Consumer Price Indices net of tax changes, energy, and fruit and vegetables continue to hover around the midpoint of the target range. However, inflation expectations for various ranges - which are an important component in our analysis for examining the monetary process - are at the upper bound of the target, and some of them have even been above it in recent months. I note that the expectations incorporate expected tax increases as well. The Committee’s assessment is that among the factors that are liable to lead to an increase in the inflation environment are: the continuation of the war and its impact on economic activity, including shekel depreciation, housing market activity and the limitations on it, fiscal developments, and global oil prices.
Yaron continued that an analysis of real activity in the economy indicated, "The overall level of activity in the economy is still lower than what prevailed just before the war. Since the previous interest rate decision, the strong recovery in economic activity seen in the first quarter of the year has moderated. Based on current indicators, the economy’s growth rate moderated in the second quarter, and supply constraints are weighing on the convergence of economic activity to the prewar trend. The growth rate of private consumption, which recovered in the first quarter of 2024, also declined slightly during the second quarter, as reflected in credit card expenditure data.
"However, we see encouraging improvement in the amount of capital raised by startup companies in the second quarter, which serves as a significant indicator in view of the high tech industry’s importance to the Israeli economy."
Housing market developments
"We closely follow housing market developments. In recent months, home prices have increased markedly, after declining in 2023. In May, mortgage volume increased compared to previous months, to NIS 7.8 billion.
"In parallel with an increase in demand, the construction industry is still not operating at its full potential and is impacted mainly by a shortage of workers; the return of construction sites to full activity is proceeding slowly. As the main bottleneck on the supply side is the manpower constraint, it is important to continue promoting the process of bringing in foreign workers from various countries to the construction industry. In addition, subject to security related guidelines and limitations, maximizing Palestinian workers’ potential in the industry should be considered. In addition to maintaining the activity in the immediate term, measures should also be taken to maintain the high supply of construction over time. As I have noted in the past, this is the key to moderating housing prices.
Government budget
Yaron said, "The general size of the budget adjustments required is significant, and thus the early start in the Ministry of Finance of a budget formulation process is a positive step. I emphasize that if decisions will be taken that involve additional permanent increases in the defense budget, further adjustments will have to be made accordingly. It is the government’s responsibility to take the necessary steps, even if some of them may not be popular, to ensure economic stability and to promote sustainable growth.
"If the government only partially implements the fiscal adjustments required, or defers the approval of the budget into 2025, and/or approves further increases in military expenditures and permanent expenditures, it is liable to lead to an additional increase in Israel’s risk premium. This would be a result of the formulation of the perception in the markets that the debt to GDP ratio is on an uncontrolled path."
During the press conference, Yaron was asked by "Globes" how he explained to investors around the world about Israel's economic situation due to the impact of the war on macroeconomic data, together with Israel's high credit default swap (CDS) and the credit yield spreads between Israel and the US. He said, "When I travel around the world, I invest a lot of input on the budget adjustments we are making in Israel and focusing on the major adjustments we will make in the 2025 budget, as long as the war continues. At the same time, I stress that the economy in Israel is still growing and high-tech fundraising is still rising."
Published by Globes, Israel business news - en.globes.co.il - on July 8, 2024.
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