The Bank of Israel’s Monetary Committee decided on January 1, 2024 to reduce the interest rate by 0.25 percent to 4.5 percent “in view of the war.”
The Committee said it was focusing its policy on “stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity.”
“We are in the midst of the “Swords of Iron” War, and the State of Israel is facing complex times. Even now, our sons and daughters are at the front, defending us, and I want to express our support and send them our appreciation,” Bank of Israel Governor Professor Amir Yaron said Monday.
“Israel’s economy has strong foundations, and the economic starting point with which we entered the war was positive. The debt to GDP ratio, one of the most important indicators of the economy’s resilience, had declined back to approximately 60 percent, the expected deficit in the budget was low, the unemployment rate was low, and the growth forecast was encouraging, certainly from an international perspective.”
The war is having significant economic consequences, however, both on real economic activity and on the financial markets, the Committee noted. “There is a great amount of uncertainty with regard to the expected severity and duration of the war, which is in turn affecting the extent of the impact on activity.”
Nevertheless, the economy has demonstrated its ability in the past to recover from difficult periods.
The pace of inflation continues to decline, and an analysis of the inflation dynamic measured both quarterly and semiannually also shows that the pace of inflation is moderating.
Inflation expectations from various sources are that inflation will enter the target range in the first quarter of the year, the Committee said.
Since the previous interest rate decision, the shekel (NIS) strengthened by 2.7 percent against the US dollar, by 1.7 percent against the euro, and by 2 percent in terms of the nominal effective exchange rate.
The Bank of Israel Research Department staff predicts that Israel’s GDP will grow by 2 percent in each of 2023 and 2024, and by 5 percent in 2025. In view of the war, there is an “especially high level of uncertainty” in the forecast, however, including with regard to decisions that the government will need to make regarding how the budget will deal with the defense and civilian needs arising from the war.
“As I have already noted, the Israeli economy is fundamentally robust and it has the characteristics needed to prosper even while waging the war. However, this does not occur on its own. The policies that will be adopted to deal with the numerous difficulties will have a decisive impact on the economy’s ability to return to rapid growth,” Yaron said.
“The government should adopt the budget processes required to deal with the costs of the war and with the increased defense budget in the coming years in order to return the economy as rapidly as possible to a path of sustainable growth and not to deteriorate to lost years. The principles for that are clear: focusing on the expenses of the war and expenditures that are growth drivers, while cutting nonessential expenditures, certainly those that do not support growth,” he added.
