Yesterday, the Bank of Israel Monetary Committee decided to keep the central bank’s interest rate at 4%, as expected. The decision came a day after the Knesset passed the 2026 budget. Talking to “Globes”, Governor of the Bank of Israel Amir Yaron criticizes the way the budget was put together and the breach of the budget framework, but admits that “we had little influence there.”
The budget passed with an extra NIS 800 million for the haredi education system, secured through a parliamentary maneuver, and set a fiscal deficit target of 4.9% of GDP. Just hours later, however, the Ministry of Finance chief economist released revised estimates, cutting more than 1% from the economic growth forecast issued at the beginning of the current round of fighting with Iran. Since the deficit target is expressed as a percentage of GDP, the revision could be critical for the chances of the budget target being met. Indeed, at the press conference following the interest rate announcement, the governor of the Bank of Israel stated that the gap between the 5.3% deficit forecast by the bank and the 4.9% target in the budget arose from the lowering of GDP growth projections because of the war.
Overnight, the government confirmed a fiscal deficit target based on a certain growth forecast. In the morning, the Ministry of Finance changed the growth forecast, which you say will affect the deficit. What’s your view of this step, and its timing?
Yaron: “In my humble opinion, since we have gone from growth of 5.2% to 3.8%, under our models, that will certainly affect the revenue forecasts. If this information was available to the decision makers, and given the timetable I don’t know when it became available, it ought to have been taken into account. Either they should have raised the deficit target to reflect the budget, or further adjustments should have been made to the budget to meet the original deficit target.”
You are criticized for making the government’s life easy, after they failed to adopt any of your recommendations in constructing the budget, distributed funds to coalition parties, underhandedly passed a huge deficit, with no control over the defense budget. What else needs to happen before the governor of the Bank of Israel says ‘I’m not playing by these rules anymore’?
“Let’s look at things in perspective. In the budget passed before the outbreak of war in October 2023, we insisted that the deficit target should be less than 1%, and that’s how it was, and we were influential in preventing changes even though there were many parties urging change. That provided the cushion when the October 7 war started as far as the debt:GDP ratio was concerned. In the revised 2024 budget too our line was that although the debt:GDP ratio only rose to 67%, there should be adjustments to the budget, and that’s what happened. We insisted that the Nagel committee should be formed to examine the military budget, and it was. In 2025, we influenced the additional adjustment measures. On these points, we had very considerable influence.
“On the 2026 budget, we and the officials at the Ministry of Finance reached the understanding at the beginning that the deficit should be a little above 3%, so that we would see a declining debt:GDP ratio. As you know, in advance of the government meeting, the target rose to 3.6%, and by the end of the meeting it was 3.9%, and now it’s 4.9%, and we estimated that with the projected growth rate it will be 5.3%
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“So in the final stages when there were very many changes within a short time, we had little influence on the final adjustments that were introduced.
“Taking a longer perspective of these past two and a half years, not only did we maintain the structure and the framework, but we also had an impact on the details within the framework. Does that mean that we have no reservations? There are some. In the end, I am the economic adviser to the government, and it makes the decisions. We make decisions independently on monetary policy, which takes into account the fiscal data among all the parameters of the economy.”
A reasonable interpretation of Yaron’s remarks is that the Bank of Israel did not succeed in influencing the budget frameworks, and these have an impact on the Monetary Committee which sets interest rate levels. So when the frameworks are high and are even liable to be breached, as the bank estimates, that will affect the rate of interest rate cuts, which takes into account the fiscal deficit and the debt:GDP ratio.
The Bank of Israel’s forecast covers not just the fiscal deficit, the debt:GDP ratio, and economic growth. It also covers inflation and interest rates. The Bank of Israel estimates that inflation will be 2.2% this year, which compares with a forecast of 1.7% in January. In January, the Bank of Israel Research Department thought that the bank’s interest rate would be 3.5% at the end of this year. It now sees the rate being 3.5% in the first quarter of 2027, or even 3.75%. That is to say, it predicts one or two interest rate cuts over the next year.
The capital market, on the other hand, expects lower inflation, of 1.8%, but no change in interest rates.
“In previous periods, we have seen the market price in more interest rate cuts than we stated in our forecasts. Until Operation Roaring Lion, the market priced in almost four interest rate cuts during 2026. We think that as long as we’re in the base scenario (in which the war ends by the end of April, A.Z.) in which inflation does not diverge, we’ll see it moderate, and supply constraints weakening after April, and we’ll be able to reach 2027 on a normalization track.
“I admit that there’s always a great deal of uncertainty in these matters, but that’s especially true at this time. It depends on the duration and intensity of the war and on the way it ends. We see less exposure to energy prices, and as long as we don’t see a rising risk premium and as long as the exchange rate doesn’t change materially, there’s a chance that we’ll see these things happening.”
Published by Globes, Israel business news – en.globes.co.il – on March 31, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
