Bank of Israel Governor Prof. Amir Yaron spoke about the US tariffs storm sparked by President Donald Trump. Speaking after the Monetary Committee announced its decision yesterday to keep the interest rate unchanged at 4.5%, he said, "The global economy is undergoing an upheaval the like of which we haven't seen in years. It is difficult to estimate the magnitude due to the uncertainty and the repercussions. From the perspective of the State of Israel, there are ramifications, but we estimate that they are more moderate due to the nature of the country's exports."
Yaron added, "We estimate that exports of goods to the US, which constitute about 13% of total exports of goods and services, will be significantly affected as a result of the tariffs imposed by the US government."
The Bank of Israel Governor was also interviewed by "Globes." He spoke about inflation, the tariff storm and the Bank of Israel's restrictions on the real estate market.
Due to the storm over tariffs in the US, how do you assess the risk to the inflation and interest rate outlook in Israel?
"We have estimates of what happens when inflation in the US rises. There are many parameters to weigh here. On the one hand, the oil market is falling and contributing to the decline in inflation, on the other hand, there is a knock-on effect for inflation in markets abroad and in Israel. The third familiar factor is the volatile exchange rate, which also affects the price level."
"The exchange rate in Israel and the knock-on effect for inflation in the US have a stronger link to what is happening in Israel than to changes in the energy market. Therefore, there is a certain risk here that as things settle down, and inflation rises in the US, we will see inflation not shaping up as we want and predicted previously."
"As long as this is happening," says Yaron, "it will require us to be cautious and maintain a restraining interest rate over time. On the other hand, a decline in global activity will lead to a deflationary effect in certain countries and this could also reach Israel. I have stressed that there is currently a lot of uncertainty. It is not clear what the consequences will be in the end."
Do you want to see more competition in the banking industry?
The OECD report on the Israeli economy showed that the banks' margins were at the organization's average and even emphasized that due to the risks in the economy, banks must maintain high margins in order to maintain their stability. However, Yaron believes that there is still a way to go.
"Israeli banks have returns on their shares. It was low before Covid but rose after it. We estimate that the banks' return on equity has reached 75% of the OECD average."
How do you want to see the banking system?
"We have two important elements in our vision. The first is a stable and responsible system, and we have seen that it does indeed exist. However, we are also interested in increasing competition, which requires structural changes in infrastructure, with more players, products, and competition."
Prof. Yaron stresses that results take time, and the Bank of Israel hopes that in the coming years it will reach the finish line of the process. He qualifies that: "Remember that we are still in wartime, the processes we are carrying out will take time to bear fruit."
A question that arises in the context of banks is the impact of the latest decision issued by the Bank of Israel on building contractors and developers financial offers. Last month, the Supervisor of Banks published a temporary order in which restrictions will be imposed on banks' capital allocations to apartment construction projects, in which at least 25% of the apartments were sold in discount operations (in 20/80 offers). A step designed to reduce the number of building starts.
Are we already seeing any impact on these financial offers?
"We allowed this activity especially during the war due to the desire to allow contractors maneuverability despite low demand. The plan existed even before October 7, but the volumes were lower. As we saw the situation, the volume rate resulted in people being able to sign deals that were not underwritten with consumers not knowing what they would receive in four years (when construction is completed). Therefore, we decided to reduce the scale of this activity. The reduction improves supervision and also helps with economic stability. But the matter has only just begun, and we still do not expect to see an improvement."
When will we see a change?
"We are monitoring the banking system to examine the situation, and we need to understand that first and foremost we see the consumer here. We estimate that we will see these processes starting in the coming months and we will be able to examine if a balance is being achieved."
Published by Globes, Israel business news - en.globes.co.il - on April 8, 2025.
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