Israel Central Bank cautions on fiscal risks amid conflict with Hamas

Shafaq News/ Israel's central bank has warned about the government's fiscal response to the ongoing conflict with Hamas, raising concerns about increased debt and potential obstacles to further monetary easing. This caution follows the recent interest rate cut, the first since the global pandemic's peak in 2020.

As anticipated by most economists, the monetary committee lowered the key interest rate to 4.5%, breaking a pause in place since July. Market expectations are leaning towards rates falling below 3.4% by the close of 2024.

An updated outlook from the central bank's research department reveals that the government is on track to run a larger budget deficit than estimated in November. Additionally, the fiscal costs of the conflict have been upwardly revised to approximately $58 billion.

Despite the uncertainties, the central bank's research department projects a path towards decreasing public debt as a share of economic output after 2025, contingent on implementing necessary fiscal adjustments.

In a news conference, Governor Amir Yaron emphasized the need for fiscal adjustments that reduce expenditure and boost income. He underscored the potential impact of risky fiscal policies on future rate decisions, cautioning that a prolonged path of rising debt could lead to increased yields, depreciation, and inflation.

Governor Yaron stressed the importance of acting now to adjust the budget, cautioning that failure to do so could pose long-term economic costs. The central bank's decision reflects a delicate balancing act amid economic challenges, geopolitical uncertainties, and ongoing conflict dynamics.

While the shekel initially experienced gains, it later stabilized against the dollar following the rate announcement.

In a statement accompanying the decision, policymakers reiterated their focus on stabilizing markets, reducing uncertainty, ensuring price stability, and supporting economic activity. The central bank, however, did not provide a clear signal on the timing of its next move.

Deputy Governor Andrew Abir noted that while falling inflation and a recovery in financial markets allowed for the start of rate cuts, the easing cycle would take time due to the ongoing conflict and budget uncertainties.

Finance Minister Bezalel Smotrich praised the rate cut, indicating support for economic growth amidst the conflict. However, there appears to be a divergence of views on budget discipline.