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Bank of Israel cuts growth forecast as Tel Aviv braces for economic hardships

Israel’s Finance Minister Bezalel Smotrich has now informed the media about the Benjamin Netanyahu government readying an economic aid package for those affected by Palestinian attacks

Amid the ongoing Gaza tensions, the Bank of Israel has now reduced its growth forecast for 2023 and the following year, while citing a ‘high level’ of uncertainty about the length and breadth of the conflict with Hamas and the absence of necessary government actions to finance the ensuing economic fallout.

The central bank stated that it now projects the economy to grow by 2% in 2023 and 2024, assuming that the war will be primarily fought on the southern front. This is less than the 2.3% growth it had previously predicted in October for 2023 and 2.8% in 2024, as well as the 3% growth it had previously projected for this year and next year.

“The revised forecast was built under the assumption that the war’s direct impact on the economy will continue into 2024 although with declining intensity — as opposed to the assumption in the October forecast that the direct impact will be concentrated in the fourth quarter of 2023 alone,” the central bank said in a statement.

The central bank held the benchmark interest rate at 4.75%, in keeping with most economists’ forecasts, in tandem with the revised growth estimates. The Bank of Israel’s monetary policy decision to keep borrowing costs unchanged for a fourth time since July 2023 comes as Israel is 52 days into a war with Hamas, which started on October 7 when about 3,000 from Hamas entered the country via land, sea, and air and killed about 1,200 people—mostly civilians—while holding hostages in Gaza.

However, a brief ceasefire has now been announced in the region, with the International Committee for Red Cross facilitating the transfer of hostages/prisoners between Hamas and Israel.

Coming back to the economic front, the Bank of Israel has gradually raised interest rates over the previous 19 months to combat rising inflation, from a record low of 0.1% in April 2022 to 4.75% in July 2023. Since then, the cycle of raising borrowing costs has paused. It has been seen that even before the war started, the burden of high interest rates started to catch up with households and mortgage holders.

In fact, now the central bank sees the conflict costing Israel over USD 50 billion

An updated outlook from the monetary authority’s research department said that the war’s “gross effect” on Israel will be as high as USD 53 billion (198 billion shekels), with over half of it being spent on defence alone. The estimation almost follows the same trajectory of how the other analysts and media reports foresaw the war’s impact on Israel’s fiscal health.

Government’s Plan To Mitigate The Crisis

Tel Aviv-based investment banking and financial advisory firm, Leader Capital Markets, earlier stated that the Gaza war would cost the Israeli economy an estimated 180 billion shekels (USD 48.5 billion) in 2023-24. Breaking down the stats further, the Israeli finance ministry stated the conflict was costing the economy close to USD 270 million daily.

In fact, the Calcalist financial newspaper, while citing finance ministry figures, recently said that the war would cost Israel USD 51 billion, thereby equalling up to 10% of the country’s GDP.

Israel’s Finance Minister Bezalel Smotrich has now informed the media about the Benjamin Netanyahu government readying an economic aid package for those affected by Palestinian attacks.

The Bank of Israel Governor Amir Yaron has been warning about the fiscal ramifications of the war which his country may have to endure for at least a medium-term.

“Alongside the need to provide a budgetary response to needs created by the war, in emergency times as well there is considerable importance to maintaining a responsible fiscal framework,” said Yaron, as quoted by Bloomberg.

“It is important that the government cut new expenditures of a prolonged nature,” Yaron said, as the bank has reportedly been criticising the Benjamin Netanyahu government’s reluctance to scrap expenditure on religious programmes and West Bank settlements, as the Jewish nation is already facing the pressure of raising funds to finance the war effort further.

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