In a cautionary statement, Governor Amir Yaron of the Bank of Israel expressed concerns regarding the country's monetary policy and the potential for interest rate hikes. Yaron noted that the current policy is appropriately aligned with moderating inflation but warned that further rate increases may be necessary if the shekel continues to weaken.
The governor highlighted the shekel's recent depreciation, stating that it has experienced an additional decline of 2-3% since the last interest rate decision on May 22. He emphasized that if this trend persists, a more restrictive monetary policy might be required.
Yaron also pointed out that the shekel's 10% depreciation against the dollar since January has contributed to inflation, pushing it up by at least one percentage point. However, he expects inflation to gradually return to the target range of 1-3% by the first quarter of 2024, with an estimated 5% inflation rate in May.
Speaking at an Israel Democracy Institute conference, Yaron stressed the importance of maintaining institutional independence and achieving a broad consensus if the government moves forward with its judicial plan.
It is worth noting that the Bank of Israel raised its benchmark interest rate from 0.1% to 4.75% in April 2022, resulting in significant increases in mortgage repayments and substantial profits for banks. This led to public discontent, prompting Finance Minister Bezalel Smotrich to propose taxing banks' excess profits as a logical response to address the distortion caused by interest rate differentials.
However, Smotrich's comments led to a 2.5% drop in the Tel Aviv banking index. Yaron supported the idea that higher rates should be passed on to customers' deposit accounts as well as loans, warning that regulatory measures could be taken if banks fail to do so.
Yaron described Israel's economy as "complex," acknowledging high economic activity and a tight labor market. However, he also noted a decline in consumer spending due to the interest rate hikes. The governor expressed concerns about the potential long-term negative effects of the judicial plan, citing a report suggesting that many local startups founded this year may choose not to incorporate in Israel.
Furthermore, Yaron highlighted that local markets have underperformed global indexes, and Israel's risk premium has increased. The recent approval of the 2023-2024 state budget was acknowledged as responsible but lacking the necessary "growth generators" for the economy, with some areas even making a negative contribution.
These remarks coincide with projections of a slowdown in Israel's economic growth to 2.5% in 2023, compared to the robust 6.5% growth experienced in 2022.
