Isranomics

Bank of Israel Governor Highlights Economic Challenges and Optimism Amid Regional Developments

by | Jan 26, 2025 | Economy | 0 comments

Bank of Israel Governor Prof. Amir Yaron recently addressed critical economic and geopolitical issues during interviews at the World Economic Forum in Davos. Speaking with CNBC, Yaron acknowledged that inflation remains above the target range of 1% to 3%, and projected that inflation could rise in the first half of the year due to increased taxes and a demand surge outpacing supply constraints. However, he expressed optimism that inflation would return to target levels in the second half of the year, paving the way for possible interest rate cuts.

Yaron also told Reuters that a stronger shekel and faster inflation moderation could accelerate these cuts. On the broader economic front, he linked regional stability to economic growth, emphasizing the potential benefits of a lasting ceasefire following the recent conflict. He predicted GDP growth of 4% in 2025 and 4.5% in 2026, following a modest 0.6% in 2024, provided further escalations are avoided.

While addressing Israel’s rising budget deficit due to significant war expenditures, Yaron praised the 2025 budget’s emphasis on fiscal responsibility, including spending cuts and tax increases. He noted that while defense spending might increase the debt burden in 2025, adjustments in the 2026 budget would likely stabilize the debt-to-GDP ratio.

International credit rating agencies have also weighed in on Israel’s economic outlook. Both Fitch and Moody’s suggested that a stable ceasefire could reduce risks to Israel’s credit rating, which had been under pressure in recent months. However, S&P warned of the agreement’s fragility, highlighting the potential for renewed regional conflicts, including tensions with Hezbollah in Lebanon and disruptions in the Red Sea.

Israel’s debt-to-GDP ratio, which climbed to 69% in 2024—the highest level since 2010 excluding the pandemic—remains a significant concern. This increase reflects the immense costs of the Iron Sword War, estimated at approximately NIS 100 billion. Despite this, historical trends indicate that Israel has previously succeeded in reducing its debt ratio over time, offering hope for a return to fiscal stability.

Image credit: Bank of Israel Governor Amir Yaron (REUTERS/Ronen Zvulun)

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