In a recent interview with Globes, the Governor of the Bank of Israel, Professor Amir Yaron, discussed the potential for an interest rate cut, suggesting it may only occur in the latter half of 2025. This outlook is contingent on the moderation of inflation, which remains a key factor influencing monetary policy decisions.

Despite various economic pressures—including a lack of budget approval, a growing deficit, and the ongoing conflicts in Israel’s south and north—the Bank of Israel has decided to maintain the interest rate at 4.5%. This marks the fifth consecutive time that the rate has remained unchanged. The decision reflects the bank’s strategy to counteract persistent inflation while navigating the broader economic uncertainties facing the country.

Professor Yaron highlighted significant supply constraints that are likely to ease by mid-2025, which aligns with the anticipated timeline for a potential rate cut. He pointed to factors such as wage increases and a tight labor market, both of which are expected to stabilize by next year. However, he also acknowledged that inflation could rise in the first quarter of 2025, potentially exceeding the central bank’s target for price stability.

The governor expressed concern about the delay in passing Israel’s 2025 budget, emphasizing the importance of timely approval to create fiscal certainty. Yaron criticized the government’s handling of the budget process, stressing that delays could exacerbate economic instability. He underscored the need for adjustments to the budget, estimating that changes totaling around NIS 30 billion are necessary. These adjustments, he argued, are vital to maintaining Israel’s fiscal credibility and ensuring a sustainable debt-to-GDP ratio.

Yaron also commented on the proposal for a biennial budget, noting that while it could provide more time for planning, it might also reduce fiscal flexibility, particularly for 2026. Given the current economic and geopolitical challenges, he reiterated that a one-year budget remains the preferable approach, allowing for necessary adjustments to be implemented more quickly.

At the recent Jackson Hole conference, Yaron spoke with global economic leaders about Israel’s economic situation. He emphasized the resilience of Israel’s economy but acknowledged that the current conflict presents challenges that could have lasting impacts, differing from previous crises where the nation demonstrated swift economic recovery.

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