Leadership Insights: Q&A With Israel Central Bank Governor Amir Yaron

Amir Yaron, governor of the Central Bank of Israel, speaks about the country’s current economic outlook and future plans.

Global Finance: What is the outlook for Israel in the coming 12 months? The main risks?

Amir Yaron: Israel’s economy is robust, with high growth, a tight labor market and a balanced government budget. Israel recovered rapidly from the Covid-19 crisis and it continues to deal well in the short term with the stormy global environment.

The growth rate in Israel is one of the highest among advanced economies—at 8.2% in 2021 and 6.8% in the second quarter of 2022—and the inflation rate is one of the lowest, at 5.2%. However, in the past year the inflation rate increased to above the Bank of Israel’s target range of 1% to 3%, and we are working determinedly to return it to within the target range. To that end, we have put relevant monetary tools into effect and we continue working to moderate the rate of price increases. Most of the forecasts indicate a return to the target range in the summer of 2023.

The main risks to the domestic economy originate in risks to global economic activity. There is considerable uncertainty worldwide regarding how economies will deal with and be impacted by the energy crisis, supply chain disruptions and restrictive monetary policies, all of which can have an adverse impact on world economic activity and trade.

GF: How strong is the banking sector and lending to businesses?

Yaron: The banking sector in Israel is robust and stable and emerged stronger from the Covid-19 crisis. The resilience of the Israeli banking sector is a direct consequence of a long series of steps led by the Bank of Israel, some of which were based on insights from the global financial crisis.

The availability of loans to the business sector is high. During the coronavirus period, the bank helped many households and the business sector, with an emphasis on small businesses, through an extensive debt deferral framework and by extending credit to banks against loans that they provided to small and micro-size businesses. These provided some breathing space for many businesses. After Covid-19, a very large majority of businesses went back to successfully paying off the loans as usual and as required, so that step proved to be effective and efficient. Today, the reports by businesses on credit constraints returned to their pre-Covid levels.

GF: After the health crisis and the war in Ukraine, is there something that should prompt central banks to change policy?

Yaron: In rapidly changing times like these, the speed of the response is very important. During Covid-19, it was important to provide both fiscal and monetary support in a timely manner. The Russia-Ukraine war has added fuel to the inflation fire and expedited the need to more restrictive monetary policy. In that regard, past experience worldwide has shown that restraining the policy in a determined manner contributes to reducing the negative impact on the labor market during the adjustment period.

This crisis forced central banks to deal with inflation, which is based on both demand and supply side factors, the latter due to a shortage of commodities and supply chain disruptions. The focus now of most central banks is first and foremost on returning inflation to the target, taking care not to cause too much of a slowdown or even recession, while during Covid-19 a main emphasis was on continuing economic activity.

We are working quite diligently to make that happen, so we will be one of the advanced economies with the highest growth and the lowest inflation. Already more than a year ago, back when we identified that in general the global economy is picking up and Israel’s economy is growing faster than expected, we stopped the various special Covid-19 monetary accommodation tools, or quantitative easing—perhaps among the first to do so. Our inflation rate has been relatively low compared to other developed countries and breached the bank’s target only in early 2022. Nonetheless, our response via the interest rate has been thus far among the quickest, and determined with regard to the level of inflation and its deviation from the target. Further down the road, and even after inflation has been curbed, central banks may have to face more persistent inflation pressures than before, because 1) China may not provide as much continued  downward pressure on goods’ prices, 2) firms will opt to diversify their supply chains at the cost of higher average prices, and 3) [the costs of] climate-related investments. 

GF: What is the economic outlook overall?

Yaron: The globalization process that served the world’s economies and its people’s welfare so well in recent decades now seems to be facing significant challenges. The combination of strong inflationary pressures, which threaten to become entrenched in some economies, and an extensive energy crisis are very serious challenges to world economic activity. Global growth will suffer if these issues are not resolved. It has become evident that faster and more comprehensive coordination is needed regarding global warming, technology flows, international taxation and joint efforts to deal with health issues. How these issues are resolved may dictate the direction in which the world economy develops. In addition, in quite a few economies—and in contrast to Israel—energy prices are at unprecedented highs and weigh very heavily on economic activity.

GF: What keeps you awake at night?

Yaron: In my job, there are always numerous issues to think about and study and upon which to act. The decisions that I, and my colleagues at the bank, reach have an impact on most if not all Israeli citizens. While I am always aware of this, fortunately, after several years of experience, I tend to sleep relatively well. I also try to go running on a fairly regular basis, which helps me to concentrate and think clearly, so that ultimately I can make balanced and well thought-out decisions on these matters of great consequence.