Following the Bank of Israel’s decision to keep the interest rate at 4.5% for the third time in a row, the Governor of the Israeli Central Bank, Amir Yaron, said that the country may need additional tax measures to deal with the increasing economic pressures resulting from the ongoing Israeli war on the Gaza Strip, and the regional tensions that accompanied it, according to For the Israeli newspaper Globes.
Despite rising inflation expectations and geopolitical tensions, the newspaper said that the central bank chose not to increase interest rates, citing the current rate as contractionary.
Continuing challenges
In an interview with Globes, Yaron identified multiple factors influencing the Monetary Committee’s decision, including geopolitical developments, the depreciation of the shekel, and significant supply constraints in sectors such as construction and air travel.
These factors contribute to increasing the risk of inflation, which remains higher than the bank’s target range, which ranges from 1% to 3%.
“The interest rate level is definitely contractionary,” Yaron told Globes, acknowledging the complex balance the central bank must maintain in response to changing economic signals.
Yaron stressed that although there has been a notable rise in inflation expectations, expectations remain in line with targets when looking to next year.
This delicate balance highlights the challenges facing Israeli monetary policy, especially as recent geopolitical uncertainty and escalating regional tensions add new layers of complexity.
Yaron expressed concerns about the fiscal deficit, which continued to rise due to increased government spending. Although some fiscal measures are performing better than expected, he predicted that the overall deficit could peak before potentially stabilizing towards the end of 2024. He added, “It is clear that the government at this time must do everything it can to limit the rise.” Debts and declaration of financial responsibility.
Tax measures on the horizon
With the projected 2025 deficit expected to reach about 4.5-5% of GDP, Yaron hinted at the need for further fiscal adjustments, Globes reported.
The newspaper quoted Yaron as saying, “The potential escalation in defense spending, driven by prolonged regional tensions, may necessitate additional or urgent tax measures. The planned increase in value-added tax, scheduled for 2025, may need to be reconsidered or introduced to address these issues.” Financial challenges.
“In light of the developments, further steps will be needed,” Yaron added, noting that the government must remain vigilant and proactive in managing the economic repercussions resulting from continued unrest and spending pressures.