Bank of Israel Governor Signals No Interest Rate Cuts Until Late 2025 Amid Economic Uncertainty

The Bank of Israel is unlikely to lower its interest rate shortly, despite expectations of rate reductions in other countries, including the United States and the Eurozone. The central bank recently maintained the interest rate at 4.5%. In an interview with Ynet, Bank of Israel Governor Prof. Amir Yaron indicated that reducing the basic interest rate is improbable even within the first two quarters of 2025, given the current economic and geopolitical situation.

Governor Yaron emphasized that as long as the ongoing war continues and Israel’s geopolitical situation remains precarious, reducing the interest rate will be difficult. He also highlighted the importance of passing the state budget for 2025 on time, incorporating necessary adjustments to manage the deficit effectively.

Economic and Geopolitical Challenges

In its interest rate decision, the Bank of Israel stressed that "the uncertainty surrounding the state budget for 2025, and the necessary adjustments to reduce the deficit, contributes to an increase in the risk premium and may make it difficult for inflation to return to its target."

Fiscal Adjustments Needed

Governor Yaron outlined the need for significant fiscal adjustments, suggesting that the government may need to raise taxes and cut unnecessary budgets, including coalition funds. He proposed that the required adjustments should amount to approximately NIS 30 billion. However, current proposals from the Treasury, which are still under discussion, amount to only NIS 10 billion, far short of what Yaron believes is necessary.

This comes amid resistance from Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich to implement substantial tax increases and budget cuts. Yaron also noted the importance of reducing Israel’s debt-to-GDP ratio, which will be a critical focus in the coming years.

Credit Rating Concerns

Addressing the potential risk of another credit rating downgrade for Israel, Yaron urged the government to pay attention to the statements of rating agencies. He warned that these agencies are closely monitoring not only Israel’s security and economic situation during the war but also the government’s economic policies. The governor’s comments follow a letter he sent to Netanyahu last week, urging for immediate and comprehensive discussions to finalize the state budget, including the participation of senior officials from the Ministry of Finance, who have so far been excluded from key budget talks.

The governor’s call for significant fiscal measures underscores the challenges facing Israel’s economy as it navigates the ongoing conflict and its broader economic implications.