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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Governor of the Bank of Israel Professor Amir Yaron said that Israel would spend 90 billion shekels ($25 billion) to battle the corona crisis "in a short-term scenario," or 130 billion shekels "in a longer-term scenario."

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"Without health, there is no economy, but without an economy, there will be no health."

Yaron went on to explain that the extent of the economic blow would depend on government policies.

"I am in daily contact with the prime minister. Right now, the ball is in the Knesset's hands, and I am calling on the MKs to rise above political considerations," the governor said.

"This is the time to support businesses. To enable businesses to recover once the restrictions are lifted, we have to help the people who have been hurt and the ones who have been laid off," he added.

For now, the Bank of Israel has not lowered the interest rate, unlike many other countries, but on Tuesday Yaron said: "If things get worse in the financial markets, the Bank of Israel has additional monetary tools that it will not hesitate to employ." 

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"If the government continues implementing all of the programs and undertakings that it has taken upon itself, and does not raise taxes, the budget deficit is likely to stabilize at the dangerous level of over 4.5% of GDP, and the ratio of debt to GDP will reach 75% by 2025," Yaron warned the audience at the Israel Democracy Institute's Eli Hurvitz Conference on Economy and Society in Jerusalem, according to financial daily Globes.

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"This is a significant scale, and it does not include the defense budget supplement that the government may implement," he said. "In a downturn scenario, which is unfortunately not unlikely, the increase in the deficit and debt will be even more substantial."

According to the report, Yaron said that even maintaining the 3% deficit target set by the government "would not prevent a continued increase in the ratio of debt to GDP. The government will therefore have to make a greater effort to stabilize the ratio of debt to GDP."

Dealing with the deficit entails budget cuts for all government ministries, he added, noting that "the increase that we saw in civilian spending in recent years is a result of the fact that the government had to respond to the public's budget demands. There is therefore little likelihood that spending can be significantly cut without painful damage to the services supplied by the government."

According to the report, the BOI chief said that to meet the budgetary challenge, the government would eventually "have to take action to increase its revenue," but did not elaborate on how the government should go about it or what taxes should be raised.

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Yaron said the central bank would continue with expansionary policies since the inflation trend has changed – moving to an annual rate of 0.5% in July from a peak of 1.5% in May.

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Yaron and policymakers have changed their tone since July, when they were still holding onto the prospect of a possible rate hike this year while markets had factored out any hikes well into 2020.

"It is unclear at this stage if it is data noise … or a basic drop in inflation," he said at a conference. "But it is clear to us that we must continue to strive and raise inflation toward the center of the (1-3%) target."

Yaron noted that risks to the economy had increased and that if the risks were realized, "We will want to act in a timely manner to prevent any slowdown in economic activity."

"How will we do this? We have a variety of tools, and all of them are on the table," he said, citing standard tools and tools that have not been used for a long time, without elaborating.

Last week, the monetary policy committee held the benchmark interest rate at 0.25% and said that given the turnaround in the inflation environment, monetary policies of major central banks, the slowing in the global economy and continued appreciation of the shekel, the interest rate would not be increased for an extended period.

The statement was a reversal from one in previous decisions that said the path of rate hikes would be "gradual and cautious."

"The message changed because the data changed," Yaron said on Sunday. "In a relatively short time, we saw a decline in inflation, a change in the direction of global monetary policy, a worsening of risks to the global economy and a relatively sharp appreciation of the [sheke] exchange rate."

Still, he said Israel's economy was growing at a good pace with a tight labor market, and the slowdown globally has not yet impacted growth, "not even exports."

Yaron also said the Bank of Israel will intervene in the foreign exchange market if it deems the shekel exchange rate deviates substantially from the level it believes is warranted. "And no one will receive a warning letter from us ahead of time," he said.

The shekel has appreciated 5.5% against the dollar so far in 2019, helping to push inflation down.

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Yaron, 54, is a finance professor at the Wharton School of the University of Pennsylvania, where his work focuses on asset pricing, macro-finance and applied time series econometrics, according to his online curriculum vitae.

Yaron got his doctorate in economics at the University of Chicago, where he also earned his second master's in economics. He has a master's degree in economics from Tel Aviv University, where he also earned his bachelor's degree in economics and sociology.

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon were due to formally announce the nomination on Tuesday afternoon, ahead of presenting it to the Public Service Nominations Committee for confirmation.

Meanwhile, the Bank of Israel left its benchmark interest rate unchanged at 0.1% on Monday, citing a belief that inflationary pressures will ease further in coming months and that is likely to shift any rate increase into 2019.

All 13 economists polled by Reuters had forecast no change by the central bank in what was the 57th and final decision for Bank of Israel Governor Karnit Flug, whose five-year term ends next month and who opted not to seek a second term.

Speaking at a press conference, Flug, who replaced Stanley Fischer in 2013, said the bank's Monetary Policy Committee discussed the conditions necessary to withdraw from the bank's "very accommodative policies."

"The committee reached the conclusion that these conditions are still not fully in place," she said. "At the current time, the committee was of the opinion that it is still best to wait in order to verify … that the inflation environment is not just within the target but is entrenched within it."

Inflation eased to an annual rate of 1.2% in August from 1.4% in July, remaining within the government's target of 1% to 3% a year.

There had been a growing belief that after leaving the key rate unchanged since early 2015, policymakers would start tightening as early as the next decision on Nov. 26 – especially since the central bank's own economists had been projecting a 15-point hike in the fourth quarter.

But in an updated forecast on Monday, they pushed back the start of rate hikes to 2019, with an expectation of the rate ending at 0.5% next year for a total of 40 basis points of monetary tightening.

The delay stems from expectations that "there is likely to be a transitory decline in the inflation rate" to below the lower bound of the target range, the central bank said,

The bank's economists estimated an inflation rate in 2018 of 0.8% – down from a prior projection of 1.2% – and rising to 1.5% in 2019.

Flug referenced the postponement to next year but said the MPC was not committed to the forecast.

"The committee does not commit in advance to a date for the first interest rate increase," she said. "In any case, the [bank's] Research Department assesses that when the interest rate begins to rise, it will rise moderately, so that the interest rate gap with the United States will be maintained and even increase."

The bank's staff also maintained an economic growth forecast of 3.7% for 2018. It foresees 3.6% growth in 2019, up from a prior estimate of 3.5%.

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