Bank of Israel Governor: "Strong institutions are key to economic prosperity"
Amir Yaron discusses the connection between institutional stability and economic growth in light of political unrest.
"The Israeli economy is demonstrating resilience and a significant recovery, but it is impossible to ignore the ongoing economic challenges and the profound consequences of the war," said Bank of Israel Governor Amir Yaron in an interview with Calcalist, after the bank he heads decided to leave the interest rate unchanged at 4.5% for the ninth consecutive time. In the interview, Yaron also addressed the delay in appointing his deputy, the government's intention to dismiss the Attorney General, and the implications of tax increases and the budget.
The interest rate has not changed, but the composition of the Monetary Committee has: the decision was made without your deputy, Andrew Abir. Why do you think the Prime Minister is delaying the extension of his appointment?
"I recommended extending Andrew's term for another period, and we are of course awaiting official approval, as required by law. As far as I understand, there is no reason for delay or procrastination with this approval, and I believe it will happen in the coming days."
What are the implications of the absence of an acting deputy governor? Does this harm the bank?
"I have been working with Andrew for more than five years. His contribution—not only to the interest rate decisions but to the overall work of the bank—is extremely important. There are many issues that I delegate to him, which is why I recommended his reappointment. If your question specifically refers to the fact that he wasn’t on the board today, the setting of the interest rate is supported by a professional infrastructure led by many employees in the various divisions. I also appointed Dr. Golan Benita, head of the Markets Division, who previously served as my chief of staff."
"The war created heavy costs for the economy"
Recently, Finance Minister Bezalel Smotrich published a report to the public in which he presented a rather optimistic view of the Israeli economy post-war. When asked if he agreed with the report, Governor Yaron responded: "There is no doubt that the economy has shown remarkable resilience. This is evident in the decline in the risk premium, the appreciation of the shekel, and increased local consumption activity."
However, Yaron emphasized that significant challenges remain: "We are still facing supply constraints, which is reflected in the fact that much of the increased demand is being met by a rise in imports. Therefore, the situation is more complex. It is clear that the war created substantial costs for the economy, and these effects are still being felt. The GDP level is over 4% lower than the pre-war trend, and while the risk premium has decreased, it remains higher than it was before the war, reducing investments, making borrowing more expensive, and increasing interest payments.
"Additionally, we have high defense spending, which will inevitably lead to tax increases and even cuts in government spending in other areas. This has also led to a renewed increase in inflation, which has prompted a higher interest rate trajectory, creating further challenges for the economy. Overall, while the Israeli economy is demonstrating resilience and a significant recovery, it is impossible to ignore the ongoing economic challenges and the profound consequences of the war."
State tax revenues soared to an all-time high in January. Do you think there is room for tax cuts soon?
"We understand the burden of various tax increases on households and businesses. However, we must also recognize that, given the large defense expenditures, fiscal responsibility is crucial. In order to avoid an increase in the debt-to-GDP ratio, tax increases were necessary.
"Regarding your question, a significant portion of the increase in tax revenues—such as the higher dividend distribution at the end of 2024, in line with our recommendations—stems from the tax adjustments that were made, including advancing purchases. These could be quite temporary. Moreover, in light of the Nagel Committee's recommendations and the existing adjustments, the projected debt-to-GDP ratio will not decrease even after 2026. In other words, if all the recommendations are adopted, we will likely need to make another set of adjustments to ensure a decreasing debt-to-GDP ratio. It will take time to determine the path of taxes in the coming months, so I would not make changes to the decisions that have been made, especially not at this stage, when significant uncertainty remains."
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You mentioned uncertainty. Do you think the expected dismissals of the Attorney General and the head of the Shin Bet will impact the economy, or are these processes unrelated to the economy?
"I have consistently stated that there is a close connection between the strength and independence of institutions and the prosperity of the economy. This year, we also saw that receiving the Nobel Prize in this field (given to Daron Acemoglu) strengthened this understanding. Therefore, any action interpreted as undermining institutions could harm both the markets and the economy."
The state budget for 2025 has not yet been approved, and we are entering the third month under a continuing budget. Is this hurting the economy?
"A continuing budget is inherently suboptimal because it does not adapt to the current needs of the economy. This is always true, but this year the challenge is greater since the 2024 budget base does not include defense spending. As a result, the continuing budget will be significantly lower than the actual needs, creating large gaps between budgetary requirements and what is available. In short, such a budget is unsustainable. Therefore, the budget must be approved without further delay and without additional changes. This is a key component in strengthening the markets' confidence in our economy."
What are the implications of the first steps of Trump's policy on the Israeli economy?
"There have been various statements, but many things have yet to be implemented. Currently, there is considerable uncertainty about the scope of tariffs the US will impose and the reactions of other countries. As a result, it is difficult to assess the overall impact of these measures on the global economy, and by extension, on Israel. However, regarding Israel, there is slightly less direct risk because our economy is more services-based."
