Bank of Israel Governor Amir Yaron Talks Israel's Economy

**SPEAKER_1** (0:02)
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**Dani Burger** (0:11)
Central Bank governors and finance leaders will convene for the Jackson Hole Economic Symposium next week. Among them attending is Amir Yaron, governor of the Bank of Israel. He's stopping by on his way over to Jackson Hole. Governor, thank you so much for joining.

**Amir Yaron** (0:25)
Thank you for having me, Dani.

**Dani Burger** (0:27)
This symposium happens at a time when we are just seeing yields across the globe hit generational high levels on the long end of the curve. I know you're currently engaging in a rate cutting cycle, or at least you have cut rates, but more broadly, just how difficult of a rate environment do you and your peers find themselves in now?

**Amir Yaron** (0:45)
Well, we've been on a different cycle than the rest of the world, partly because of the war, and we've kept rates for quite a long time at a high level, at around four and a half percent. But since November, we've had four cuts, and we're now at three and a half, and the last two have been two consecutive ones in May and July. And our research department has penciled in that three percent in 12 months from now. But ultimately, we've had to manage huge uncertainty.
And you know, our next meeting, which is about two weeks, will be a live one, because we are, you know, we're going to have to look at the developments on inflation. Inflation now is at one and a half percent, but it's going to go back up towards the center of our target, around two percent in the next few months. We just had very, you know, strong GDP numbers come in. The last quarter, the growth rate was at 15 percent, although there are some caveats there about certain segments being produced abroad. But generally, these are very strong numbers, so we are going to have to look at labor, inflation, geopolitical risks, fiscal risks, and all of these considerations will be brought into the table in the next meeting. And of course, what's going on in the rest of the world also influences us.

**Dani Burger** (2:13)
How difficult is that for a smaller economy, which is very open, has a lot of global influences, to be engaging on this part of the cycle when the rest of the world, rest of the developed world, there are questions being asked whether they'll have to continue to raise rates?

**Amir Yaron** (2:25)
So first of all, Israel enjoyed kind of the fact that we have LNG. And so the rise in oil prices, to some extent, we've been immune from that. The main issue for us along the way has been shortage of labor. And we had to explain to the public, even though output is below its pre-war potential, we actually in what's called positive output gap, because we just don't have labor, and therefore we couldn't reduce interest rate along the way, and because of the uncertainty. As you know, reserve duty have somewhat subsided, there's a little bit more clarity, and inflation due to our monetary policy has brought inflation successfully to be around 2%.
We were able to do these cuts, while in the rest of the world, we've seen obviously inflation has gone up, and so we either see our cycles that are going up, or at least not reducing the rates as they were expecting to do prior to the war.

**Dani Burger** (3:31)
Well, the defense spending, for a very obvious reason in Israel has surged, and Prime Minister Netanyahu also wants to increase that spending as well. The cost of financing, the cost of debt for government, especially as spending increases, how much of that is on your mind as you calculate policy?

**Amir Yaron** (3:48)
It is very important. Let me just first say the Israeli economy and the Israeli people have shown great resiliency throughout the war.
You know, we've seen it in credit card expenditures, VC money coming in, export. It's part of the dynamic and agility of the economy. And in fact, the numbers I just said about GDP have brought GDP to be about just below 1% from its long-term pre-war trend. That, in reference to other wars, is a big accomplishment. The big fiscal challenge, however, ahead is managing what I call the fiscal trilemma. And any new entry government after the election will have to deal with it. And that is bringing Israel back on a path that is a declining debt, managing the defense expenditure. And obviously, they will be derived partly from the map of security needs that will arise. And third, investing in growth expenditures, growth engines, and managing these three is going to be difficult. With it, there are going to be issues like, how do you bring the ultra-orthodox community back into the workforce? How do you draft them? These are social and political issue, but we have shown in the bank they have immense economic ramification as well.