Governor of the Bank of Israel Expresses Concerns Over Possible Credit Rating Downgrade

In a recent hearing at the Knesset's finance committee, Professor Amir Yaron, the Governor of the Bank of Israel, voiced apprehensions regarding the potential downgrade of Israel's credit rating. Prof. Yaron acknowledged the increased risk premium since October 7, emphasizing the necessity for the government to implement challenging measures in the 2024 state budget to address economic concerns.

The Governor expressed hope that international rating agencies would refrain from lowering Israel's credit rating and consider the government's commitment to making necessary budgetary adjustments. Moody's, a prominent rating company, is expected to release a report soon, indicating a possible downgrade from Israel's current A1 rating.

Prof. Yaron highlighted the need for tax increases to address the state budget deficit and underscored the economic implications and budgetary costs in the short and long term. He urged the preservation of the framework for these measures during discussions in the Knesset.

Regarding the high-tech sector, the Governor noted a more decentralized market compared to the dot-com crisis, emphasizing the importance of attracting investors for the benefit of young companies. He acknowledged the initial decline in high-tech in 2022 and urged support for companies reaching the next stage.

In terms of inflation, Prof. Yaron stated that, formally, Israel is within the target, with a focus on the housing component and the dynamics of moderation. He cautioned against hasty decisions on interest rates, emphasizing the dependence on data and the existing uncertainty.

Regarding the impact of the recent conflict, the Governor noted Israel's resilience and positive economic indicators during and after the war. He acknowledged an increase in the risk premium but emphasized its moderation over time.

Prof. Yaron provided growth forecasts for the coming years, projecting 2 percent growth in 2023 and 2024, with a 5 percent increase in 2025, contingent on maintaining the budget framework. He acknowledged uncertainty, especially considering events in the north, prompting measured steps.

In response to Knesset members' concerns about interest rates, the Governor acknowledged the relatively high transmission to interest rates in Israel and discussed market expectations for future reductions based on the Bank of Israel's guidance.

As Israel faces economic challenges, the Governor's statements reflect a cautious optimism contingent on prudent fiscal measures and international considerations.