State Comptroller Urges Overhaul of Israel's Long-Standing Inflation Target Amidst Uncertainty

In a groundbreaking move, State Comptroller Mattaniho Engelman is recommending a comprehensive reassessment of Israel's fixed inflation target, which has remained unchanged at 1% to 3% per year for two decades. The recommendation comes as inflation exceeded the government's target, leading to deviations that could significantly impact the state budget and corporate financial planning.

Engelman's call for a reevaluation is grounded in the recent economic developments, particularly the surge in inflation post-COVID, with the inflation rate reaching 5.3% in 2022. The State Comptroller's Office conducted an extensive examination of various governmental bodies, including the Bank of Israel and the Ministry of Finance, to evaluate their preparedness for such a scenario.

The audit revealed that from 2003 to 2022, inflation deviated from the target range of 1.9% to 3.9%. Notably, the year 2022 saw a 2.3% deviation, aligning with global trends. Despite the significant increase, the Ministry of Finance opted not to develop a dedicated contingency plan for inflation, citing the absence of abnormal inflation outbreaks in Israel.

Furthermore, the audit uncovered that the Chief Economist's Division at the Ministry of Finance did not update its assessment of the sensitivity of state revenues to inflation, raising concerns about the government's ability to respond effectively.

Engelman recommends that the Ministry of Finance collaborate with professionals, including various departments and the Bank of Israel, to formulate economic plans in line with predicted inflation. Additionally, the State Comptroller advises the Budget Department to explore targeted fiscal measures to assist those adversely affected by inflation while preventing an inflationary spiral.

The audit also shed light on the banking sector, revealing a significant increase in the interest rate gap, benefiting banks in the short term but posing potential risks to credit quality in the future. Engelman calls for increased transparency in the transmission of the Bank of Israel's interest rate changes to the interest paid on public deposits to benefit customers.

In response to these findings, the State Comptroller recommends a systematic policy for managing government engagements linked to price indices and urges the continuation of efforts to reduce the interest rate gap in banks.

The recommended changes could mark a significant shift in Israel's economic policy, impacting not only the state budget but also the financial strategies of companies across the country. The government now faces the task of weighing the potential benefits of an adjusted inflation target against the challenges it may pose to fiscal planning.