Bank of Israel Governor Explains Interest Rate Cut Amid Risk Management

Governor of the Bank of Israel, Professor Amir Yaron, stated that the recent decision to lower the interest rate to 3.25% reflects a strategy of risk management, balancing inflation and economic activity against ongoing high uncertainty. He explained that inflation is currently below the 1.5% target midpoint and is expected to remain near it over the next year, despite anticipated increases in the coming months. While the second quarter saw strong economic activity, activity excluding exports has moderated, with third-quarter indicators showing a slowdown in demand and supply constraints, further supported by a strong shekel.

Yaron indicated that unlike a previous decision accompanied by a research department forecast, this rate cut was not. A new forecast will be released with the next decision, and the Bank of Israel will continue to operate in a data-dependent manner amidst high uncertainty. He emphasized the need for responsible fiscal policy from any future government, including a return to a declining debt-to-GDP ratio and building fiscal buffers. While acknowledging defense needs, he stressed that these should not come at the expense of essential civilian expenditures like growth engines, housing, energy, and human capital, nor should the economic burden of reserve duty be overlooked.

Regarding budget sources, Yaron reiterated the necessity of a downward trend in the debt-to-GDP ratio and fiscal cushions, meaning any budget increase, including for defense, must be matched by funding sources like increased taxes or reduced spending. He also noted that while energy and gasoline prices have risen, the Bank of Israel estimates inflation will remain near the target midpoint for the coming year, suggesting the fuel price increase might be temporary and not warranting immediate policy action.

On the housing market, Yaron does not believe Israel is in a crisis, pointing to an increase in transactions and ongoing construction. However, he suggested developers could lower prices to boost sales further. The Bank of Israel is monitoring credit utilization relative to sales in some projects where sales are not keeping pace with credit use and will intervene if necessary.