The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, today defied market expectations and cut the interest rate by 0.25% to 4%. The Bank of Israel said, “Economic activity continues to expand, with a slight easing of labor supply constraints, and a decline in the inflation environment. During the reviewed period the shekel continued to strengthen, and Israel’s risk premium is close to its prewar level.” Before the decision was announced the shekel continued to strengthen against the US dollar with the exchange rate reaching NIS 3.15/$.
Yaron explained to “Globes” why there is currently no reason to intervene in the foreign exchange market, criticizes the government’s actions in the fight against the cost of living and refers to the new tensions between the Ministry of Defense and the Ministry of Finance on the defense budget.
When will you intervene in the foreign exchange market to curb the strengthening of the shekel? Is there such a point that you have marked?
“We do not have such a point. We see that exports of services and goods have continued to rise, and the bottom line, in the meantime, exports are increasing. Our focus in the foreign exchange market is price stability and market functioning.”
Also during the press conference, the Governor addressed the foreign exchange issue and said that “Intervention in the foreign exchange market is an instrument in the toolbox to achieve the bank’s goals, and the emphasis is on maintaining price stability and supporting the regular activity of the market. We are constantly examining the adjustment of the various tools. The context is inflation, and I say that the exchange rate also has an effect on passing on inflation.
The government has announced measures designed to ease the cost of living. Yesterday, Minister of Economy and Industry Nir Barkat announced a basket of 100 products, and Minister of Finance Bezalel Smotrich announced an exemption from personal imports of up to $150. Do these measures and similar measures really lower the cost of living? What is your position on them?
“In principle, in order to lower the cost of living, we need to make infrastructure changes. This means lowering import barriers, bringing in more players, as we are still an island country. Regulatory restrictions need to be removed and concentration reduced – that’s how we need to deal with it. As much as they think that there is currently a problem dealing with it, and they proposed this basket, then there are issues there. Will there be a situation of cross-subsidization, where the basket will be cheap and other things will make the products more expensive – and will consumers be able to recognize this? Therefore, we need to make sure that under these mechanisms, it doesn’t come out as ‘your pay, your loss.’
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Regarding the issue of raising the VAT exemption to $150, our recommendation is to reduce the exemption even more than it was before ($75). We think this causes distortions and certainly in the medium term may harm some businesses. There is an issue that, except through Amazon, it is very difficult to import, so that’s why they did it. To the extent that this is the problem, it needs to be solved and this exemption lowered.”
After the agreements on the state budget, arguments began to develop between the defense and finance ministries over the defense budget. How do you, as the government’s economic advisor, see the renewed dispute?
“The defense budget is a very significant component of the overall budget. We all understand this and we all understand that the overall budget is ultimately critical in terms of its impact on the debt, the costs of the debt and the ability to direct resources to civilian needs – whether it’s education, infrastructure and so on – without getting into the current debate, which also depends on assumptions about the number of reserve days and whether there will be specific events in the geopolitical arena.
“This year, NIS 112 billion was decided upon. We need to find the most efficient way to stay within this framework, and of course, at the same time, from time to time, conduct a diagnosis of what the geopolitical situation is and whether the security risks have decreased. There are claims on the one hand that they have increased, and on the other hand, claims are made that they have decreased. We all understand that we need security for the economy, but the economy also needs security. To the extent that there is a substantive debate, not about another billion shekels here or there, in the concept of security – we need to sit down and sharpen our pencils on this.”
In other words, should we stick to the amount that was set?
“If there are any security developments behind these demands, then security officials and decision-makers should sit down and consider it, but we certainly wouldn’t want, as I said, to breach the budget framework right now. Especially when we’re around a deficit target of 3.9%, there’s great uncertainty regarding security incidents, and we don’t fully know what will happen with the taxation from the Wiz deal. Therefore, there’s great uncertainty on both the spending and revenue sides.”
To what extent did the pressures from the real estate market influence the current interest rate decision?
“There is a mixed picture in the real estate market. On the one hand, you see that there has indeed been a certain decrease in transactions. It is a certain decrease, and not that dramatic if you look over the years. On the other hand, we see high construction starts. In the last quarter, we also saw a certain increase in construction completions. Therefore, we see the decrease in prices as reflecting some adjustment in the market, and we see contractors who have purchased land in ILA tenders. There is probably still a set of price adjustments; we are constantly examining the strength of the players, and currently we do not see a high level of arrears on the mortgage side.”
Published by Globes, Israel business news – en.globes.co.il – on January 5, 2026.
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