Bank of Israel Governor Amir Yaron appeared to show a readiness to stop raising interest rates after this week's 25 basis points hike. Speaking with Israel Hayom, he left room for action should economic surprises emerge that could have him continue raising borrowing costs.
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Asked about the recent government decision to give costly allowances to ultra-Orthodox constituents as part of the Coalition agreements, he said, "I would like all Haredi children to have an equal opportunity to join the job market and have the necessary skills to do that."
He appeared to send a warning that the government's decision might not serve this goal, and does not properly tackle the cost of living.
Q: Knesset Member Israel Eichler (United Torah Judaism) said you have failed to bring down inflation and there you must submit your resignation.
"I have long been aware of his insights. In 2019, I gave a speech highlighting the importance of the Haredi sector, the importance of obtaining skills, and the Haredim's contribution to the growth of Israel's economy. The figures show that taxes will have to go up by 16% if demographic trends continue. He called me antisemitic after that speech, so allow me to ignore what he said."
Q: But on the merits of what he said, perhaps higher interest rates have not delivered the goods?
"The opposite is true. The process of raising interest rates, which we have led with resolve, has won much praise from all the international bodies. You have to realize what would have happened had we not done that: We would have found ourselves with much higher inflation, perhaps in the double digits – much like some countries have been experiencing. I would like to remind you that this kind hurts income and inflicts particular pain on the weaker classes. We could have reached a situation where people turn to other currencies when writing up contracts such as lease agreements. These would have damaged financial decision-making in Israel. Thus, we have to understand what the alternative price would have been for our actions. We understand that the process of raising interest rates causes pain, but if we had not acted this way, it would have been much worse and the risk of inflation getting worse would have been that much greater."
Q: When will we be able to see hikes stop?
"Of course, I am not going to give a promise, since we make each decision based on the data and on what we anticipate. We were taken aback by the latest consumer price index for how high it was – and we weren't the only ones. Although it had one seasonal component that was high, the bottom line is that inflation remains stubborn. We also expect the next CPI to be high. But if no big surprises emerge in the next CPI – and if there are no events that could lead to a significant depreciation of the shekel – we would be able to say that we are already in an interest rate environment that we asses to be sufficient for having us move toward the inflationary goal."
Q: Does that mean that you won't go beyond this week's decision and the benchmark interest rate will stay at 4.75%?
"While this is what we assess, this is not a pledge. We are determined and we continue doing whatever it takes. Right now, we just have an assessment that we have an environment that helps reduce inflation back to its goal as we see the current circumstances. In any event, we act based on the figures and we will do everything we can if needed."
Q: Do you feel that you are on your own in this battle? Should the government do more?
"We must make a distinction between the cost of living and the recent wave of price increases. In specific events – like after the outbreak of war in Ukraine – the government can definitely help on a temporary basis. But we see that sometimes it is hard to stop this from being a one-off thing. As for the cost of living – I stress once again that Israel is expensive on a range of issues. When it comes to the retail sector, we must make sure to introduce structural reforms. When it comes to housing, we must increase supply, we must boost building permits and zoning approvals, but we also have bids at lower prices. And of course, there is the issue of transportation. Unfortunately, all three things lack a magic wand that could bring a quick fix, but we have to reform those sectors."
Q: You previously said the government's budget was responsible and fiscally restrained. Do you still hold that view?
"The budgetary framework is conservative and meets the monetary policy, as well as the wage agreements. But within that framework, there are not enough growth-inducing elements or parts that tackle the three main sectors that I mentioned regarding the costs of living."
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