"We all understand high-tech is our locomotive. Therefore, we must maintain Israel as an open, competitive economy"
Bank of Israel Governor Amir Yaron said the indicators point toward decreasing inflation, but noted that the timing of potential rate cuts remains uncertain.
The Bank of Israel held the interest rate at 4.5% for the 14th consecutive time on Monday, defying expectations from many analysts who had predicted a cut. Governor Amir Yaron used a press conference to criticize Finance Minister Bezalel Smotrich’s recent statement that he would lower taxes if the central bank did not reduce rates. “Cutting taxes now is like drinking an espresso after taking a sleeping pill,” Yaron said.
In an interview with Calcalist, Yaron rejected comparisons with the United States, where Fed Chair Jerome Powell has recently cut interest rates. “We are not in the same position. Their labor market data has fallen dramatically, and their mandate differs from ours,” he said.
Regarding the current interest rate, Yaron emphasized risk management: “Inflation remains at 2.9%, rents are surging, and uncertainty has not dissipated. Economic conditions do not justify lowering rates simply because we want inflation to converge to target levels, not fluctuate due to one-time events. Volatile inflation in recent months shows that reducing rates prematurely could push inflation above target, disproportionately harming lower-income households and small businesses. Remember, a third of mortgages are inflation-linked.”
On the question of whether to lower rates now and raise them later, Yaron said: “That would be a zigzag approach, and it’s wrong. The risks are asymmetrical: it is far more painful to raise rates again after a reduction. Accelerating inflation would force us to take much harsher measures later.”
Regarding non-economic factors, including war and political uncertainty, Yaron acknowledged their influence but stressed that macroeconomic fundamentals remain the guiding factor. “Despite supply constraints, the indicators point toward decreasing inflation. We may see rate changes in upcoming reviews, though the timing remains uncertain,” he said.
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You travel around the world a lot. What do they say about us? Is there such a negative sentiment toward Israel?
“I meet with senior capital market executives, and certainly with other governors, and they are very interested in what is happening in our economy. There is a dual focus: they ask how we are managing after two years of war, and I make a point of highlighting the strength of the economy. We have managed, to some extent, to normalize an abnormal situation: there are Houthis, missiles, people entering bomb shelters, and then going to restaurants. This is difficult for outsiders to grasp, and it reflects the lightness, dynamism, and resilience of households and the Israeli economy as a whole. Of course, there are also negative aspects, not just positive ones. At the same time, they ask questions about where these events are ultimately heading.”
Does the story of recognizing a Palestinian state have economic implications?
“This is not purely an economic event, and it can be interpreted differently by different people. From our perspective, we want to see a process that leads to sustainable security and improved sentiment, because that is what will ultimately drive better economic outcomes.”
You mentioned the lack of a budget. Are you aware that this government does not want a budget because it is not interested in decrees in an election year? Do foreigners ask you about this? And what about Smotrich's threat to cut taxes if you don’t lower interest rates?
“I meet with investors almost every week, and the budget issue always comes up. The Bank of Israel insisted on fiscal adjustments in both the 2024 and 2025 budgets, and in this context, the government also deserves credit. This allowed us to reassure investors: “Gentlemen, despite great uncertainty, because at every stage we expected the war to end at a different time, the government is taking significant steps.
“Of course, we are behind in the budgeting process for 2026, but we need to act quickly, balancing security needs while ensuring that we can lower the debt-to-GDP ratio, which our forecast projects will reach 71% of GDP by the end of the year. Maintaining this message is key to sustaining market confidence, lowering bond yields, and supporting the inflation moderation process.
“We must continue to convey fiscal responsibility. The measures you mentioned, which push toward budgetary expansion, are not compatible with debt reduction. Given the high uncertainty and dominant supply constraints, it would be inappropriate to implement these incentives at this time.”
How do all these policies fit with Netanyahu’s Spartan vision?
“As a small, open economy, we cannot, and certainly do not want to, be closed. It is positive that the Prime Minister clarified this point. We all understand that high-tech is our locomotive, globally connected in performance and capital raising. Therefore, we must preserve all international connections and maintain Israel as an open, competitive economy.”
