At the press conference marking the release of the Bank of Israel’s Annual Report for 2024 last week, a slide was displayed that arouses special concern among the central bank’s officials. According to the figures, Israel’s debt:GDP ratio will rise in the medium term, and could reach 72% in the coming years. This is despite the need for contractionary fiscal policy, given the permanent growth in government spending because of the war.
In normal times, in a speech a week before an interest rate decision, the governor of the Bank of Israel would talk about inflation and the moderating rate of inflation. This time, however, the governor, Amir Yaron, mainly focused on the budget approved last week, or to be more precise, on what was missing from the budget. The measures introduced by the government, he said, "are not enough to ensure a reduction in Israel’s debt," and "the make-up of the adjustments made did not contribute to the ability of the economy to deal with the harm caused by the war, or with the growth potential when it ends."
In other words, the government did not carry out measures that could have improved the fiscal deficit, which stands at 4.9% of GDP, and Israel’s credibility on the markets. The central bank’s report called for implementing such measures, headed by encouragement for haredim and Arabs to join the labor market, and avoidance of money transfers that run contrary to that aim.
The Bank of Israel states that it will be difficult to ease conditions in the economy through tax reductions, and point to the fact that although the debt:GDP ratio is expected to fall in 2026, Israel will still be on a "rising debt:GDP ratio curve". A reservation about this risk is the surprising rise in taxation revenues. If that trend continues, Israel will be able to avoid losing control of the debt:GDP ratio.
On the risks side, the Bank of Israel warns of a decline in private consumption that is liable to lead to a slowdown in tax revenues. Another fear that arises from the governor’s statements concerns Israel’s high risk premium, especially in the light of the fact that he has been meeting representatives of the international credit rating agencies. Yaron pointed to the exploding pagers operation against Hezbollah in Lebanon in September last year as a point at which Israel premium, as express in the credit default swap on 5-year government bonds, began to fall, but the renewed fighting on the various fronts has seen it rise again recently.
What did Yaron nevertheless say about inflation?
This Monday, April 7, the Bank of Israel Monetary Committee will publish an interest rate decision. The market’s focus will be on the accompanying economic forecast, as the interest rate is expected to be left unchanged, at 4.5%. The central bank’s previous forecast assumed an end to the war this year, an assumption that has changed in the past month.
Expectations by analysts of inflation moderating and coming within the 1-3% target range in the coming months found no echo in Yaron’s words. He did stress that he expected the interest rate to be cut in the second half of the year.
Published by Globes, Israel business news - en.globes.co.il - on April 2, 2025.
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