The governor of the Central Bank of Israel urged Prime Minister Benjamin Netanyahu to quickly reduce public spending, warning that markets could react badly if his government fails to act on the cost (58 billion dollars) of the war against Hamas.
Speaking as the Bank of Israel cut its benchmark interest rate from 4.75 percent to 4.5 percent - its first cut since 2020 - Amir Yaron said the government's market "credibility" depends on starting to make clear budget adjustments this year.
"I would like to say as clearly as possible: the economy is likely to incur much more in the future," Yaron said, " failure to act now to adjust the budget by cutting expenditures, removing redundant ministries and increasing revenues in view of war needs will aggravate the crisis.
"In markets, the impact of a negative response is not always linear,"he added. "It is difficult to predict when the inflection point will occur, when the markets will re-price this risk, but to the extent that these adjustments are not made, the probability of this increases."
Yaron said that the central bank estimated that - assuming that the economic impact of the war continued throughout 2024, and the fighting was mainly focused on Gaza-the cost to the Israeli state budget would amount to about 210 billion shekels.
He added that while the economy had begun to recover from the initial shock of the war - which forced the closure of businesses in the area around Gaza and on Israel's northern border with Lebanon - the process was "incomplete", especially in the tourism sector.
However, the central bank maintained its forecast that the national output will grow by 2 percent in 2024 and 5 percent in 2025, while unemployment will decrease from 5.3 percent, on average, in 2024, to 3.2 percent in 2025.
The Bank of Israel expects inflation, which reached 3.3 percent in November, to fall to 2.4 percent by the end of this year, bringing it back to its target range of 1 percent to 3 percent.
"The Israeli economy is fundamentally strong and has the necessary characteristics to prosper even while waging war."However, this does not happen by itself," Yaron said.
"As in many other situations in life, what is paid now ends up costing much more and requiring much more effort and pain later on."Therefore, what is needed now is a Responsible Budget that requires adjustments and decisions that are not easy regarding priorities, "he said.
