Yaron: Interest rate forecast isn’t a promise

Governor of the Bank of Israel Amir Yaron surprised the Israeli capital market yesterday when he released the forecast of the bank’s Research Department according to which two further interest rate cuts are to be expected by the second quarter of next year, as he announced a cut in the bank’s interest rate of 0.25% to 3.5%. Talking to “Globes” after the decision by the Monetary Committee, Yaron spoke about the pace of interest rate cuts, the strong shekel, and the needs of the technology sector.

How far does the desire to halt the appreciation of the shekel influence the interest rate decision? And if the exchange rate is an important consideration, isn’t direct intervention in the market preferable?

“We look at the inflation environment and at the appreciation of the currency. Even if we would still like to see greater competition in the retailing sector and higher transmission, it still works: as the currency appreciates, the inflation environment declines. This is what has contributed to the fall in the general inflation rate, and so if we see that the inflation environment has declined sufficiently we can enter on an expansionary monetary policy. There is therefore a connection between the appreciation of the shekel, the impact on inflation, and inflation expectations.”

Analysts thought that if you were to forecast a 3.25% interest rate in a year’s time that would be a doveish signal. In fact, you sprung a surprise with a forecast of 3%.

“In addition to the appreciation of the currency, we are also seeing a decline in energy prices and in the extent of military reserve duty. Supply constraints have eased, and the fall in energy prices has been faster than was expected before the ceasefire. All these factors together bring us to a situation that at equilibrium we can see ourselves in a base scenario reaching 3%. That scenario is supportive of keeping the inflation rate in the middle of the target range, at 1.8%.

“There is geopolitical uncertainty surrounding this that could do all kinds of things to the risk premium and the exchange rate. We are seeing certain inflationary forces such as rent and pay rises. There is also the increase in the defense budget. All these things make us continue to act with caution, but taking everything into account this is the trend that we see. But it’s important to stress: this isn’t a bond or a promise. We aspire to give a degree of guidance about the future under this scenario, in a world with great uncertainty, when everyone recognizes the fact that there are sometimes great geopolitical vicissitudes.”

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Last week, “Globes” published the figures showing that a handful of technology and AI companies are responsible for half of Israel’s GDP, particularly Nvidia. Yaron was asked whether this was a reason for adopting a more relaxed monetary policy, in order to assist industries that aren’t high tech.

“I won’t specify the name of any company,” Yaron replied. “We say something somewhat the reverse. It turns out that the supply constraints where there are labor-intensive firms exposed to reserve duty and a shortage of foreign workers were tighter than we thought. All along, we said that cutting our interest rate was dependent on the supply constraints. In our forecast, we take into account the fact that there has been a considerable decline in the number of people absent on reserve duty, and we assume that that will continue a little. To the extent that in another eighteen months we are in a situation in which the economy is operating under an assessment that supply constraints are easing, then those companies will actually be able to return to functioning fully.”

And what is your opinion of the aid package that the government launched for the technology industry as a result of the appreciation of the shekel?

“I think that the government’s steps are good bridging measures. I have spoken about the fact that some of the solutions are on the fiscal side, and they are focused mainly on more vulnerable groups in the technology sector, among startups, and in traditional industry. We shall have to monitor the situation and see whether there is a need to increase or change these measures.”

Published by Globes, Israel business news – en.globes.co.il – on July 7, 2026.

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