Bank of Israel chief says war more expensive than estimated

ISRAEL’S central bank governor said the war with Hamas is a “major shock” to the economy and proving costlier than initially estimated.

While Israel’s economy is strong and stable, “there is no doubt the war will have fiscal implications and generate budget pressures,” Amir Yaron said on Thursday (Nov 9) in Washington.

Israel’s gross domestic product growth is likely to be lower by 1 per cent in 2023 and 2024, Yaron said, and “the debt-to-GDP ratio is likely to rise to somewhat more than 65 per cent by the end of ‘24, as costs are larger than it was initially projected.” 

Those estimates assume the Israel-Hamas war remains concentrated at the southern border and lasts through the end of this year, he said.

Israel began airstrikes on Gaza, which is ruled by Hamas, after the Iran-backed group swarmed into southern Israeli communities on Oct 7 and killed around 1,400 people. It’s since started a ground offensive in a bid to crush Hamas, designated a terrorist organisation by the US and European Union. More than 10,000 people have died in Gaza since the conflict began, according to the Hamas-run health ministry.

Yaron emphasised that Israel entered the war on solid fiscal footing, with the debt-to-GDP ratio below 60 per cent. The International Monetary Fund had forecast that it would fall further to around 55 per cent by 2025.

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Late Thursday, Israeli Finance Minister Bezalel Smotrich said the country’s budget for this fiscal year would increase by 35 billion shekels (S$12.31 billion) from initial projections. Most of that increase – 63 per cent – would be military spending, he said.

Yaron spoke on a panel with US Federal Reserve Chair Jerome Powell, IMF First Deputy Managing Director Gita Gopinath and Harvard University economist Kenneth Rogoff at a conference hosted by the IMF.

Israel’s central bank has cut its economic forecasts since the war with Hamas started just over a month ago. At its last rate meeting on Oct 23, the bank said gross domestic product would expand 2.3 per cent in 2023 and 2.8 per cent in 2024, down from its previous view of 3 per cent for both years. 

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The Bank of Israel also held its key interest rate at 4.75 per cent, avoiding a cut in a bid to help the shekel. The currency, as well as Israeli stocks and bonds, fell heavily when the war erupted, but they’ve recovered in the past 10 days and the shekel has now recouped all its losses. 

That’s partly because of the central bank’s support – the central bank sold more than US$8 billion of reserves in October – and also because of increased optimism among traders that the war will more or less be contained to Gaza.

Yaron said the BOI’s steps so far have mitigated fluctuations in the shekel and have provided liquidity and stability to financial markets.

“This array of policy steps that were taken by the bank in the last month reveals the sufficient and necessary independence that the bank enjoys and that it has the adequate set of monetary tools that can ensure financial stability,” Yaron said. BLOOMBERG