Smotrich Threatens the Governor of the Bank of Israel: If He Doesn't Lower Interest Rates, I Will Lower Taxes

SadaNews Economy Translation - Israeli Finance Minister Bezalel Smotrich said in a meeting with the Business Sector Leadership that the Governor of the Bank of Israel should have lowered interest rates a long time ago, and if he does not, I will lower taxes.

The Hebrew economic newspaper Calcalist quoted Smotrich as saying: "The independence of the governor is critical in a modern economy like ours, and I have no intention of interfering in his affairs, nor will I allow anyone to intervene, but freedom of expression is guaranteed, and I believe he is wrong... caution is not wise." This was translated by the SadaNews Economy section.

The newspaper noted that Smotrich's position is not surprising, but rather a typical stance of finance ministers, as the government usually cares about lowering interest rates before the central bank, which is primarily responsible for price stability. The reason is that in modern countries, including Israel, interest rates are determined by an independent monetary committee. If interest rates are set by politicians, they will seek to lower them even before achieving real control over inflation.

According to the newspaper, Smotrich went further than a professional disagreement with the governor, stating: "Just as monetary policy is subject to his power and exclusive authority, fiscal policy is also subject to my power and exclusive authority, and if the governor does not lower the interest rate, I will lower taxes... There is no other choice."

The newspaper says: Although these matters currently seem like mere threats, leaks about the 2026 budget show that Smotrich is already considering the idea of lowering taxes; thus, the finance minister is considering increasing the tax exemption on importing packages from abroad to up to $150, while at the same time, he has no intention of canceling any other exemption.

Regarding fiscal policy, there is no justification or significant capability to lower taxes, and the 2026 budget is expected to have a deficit of 4% in an optimistic scenario, which will not reduce the debt-to-GDP ratio. Therefore, this step is financially wrong.

Smotrich justifies tax cuts in order to increase the amount of money in the economy and act in the opposite direction to high interest rates that reduce the amount of money. The newspaper states. According to the SadaNews Economy section's translation.

It adds: However, determining the amount of money in the economy is a monetary issue and is under the authority of the Bank of Israel. In other words, the finance minister threatens to use a tool that is formally within his powers, but in essence, he seeks to perform the role of the Bank of Israel.

Moreover, if Smotrich does eventually lower taxes and increase the cash liquidity in the economy, it would lead to additional inflationary pressure, as the public will have more money to cover the same quantity of products, assuming that the finance minister does not intend to cut government spending by a similar amount to the proposed tax cuts.

It stated: The inflationary pressure resulting from this move will not come only from tax cuts but also due to increased deficit and debt, which will lead to increased government spending, rising interest rates, and possibly a devaluation of the shekel.

Smotrich accuses the governor of being "conservative," but as he himself says, "responsibility cannot be separated from authority." If inflation rates rise following early tax cuts, the governor will be held accountable, as he is legally responsible for the price level.

Last August, the Bank of Israel kept the interest rate at 4.5%, marking the thirteenth consecutive time.

At that time, the bank stated: In light of geo-political uncertainty, it will determine the path of interest rates according to the convergence of inflation towards its goal, the stability of financial markets, economic activity, and fiscal policy.

Regarding inflation, which reached an annual rate of 3.1% in July, the bank confirmed that core inflation (excluding food and energy prices) remained at a high level of 3.5%, which is half a percentage point above the target, explaining that prices of tradable goods, which are supposed to ease overall inflation, have increased for the second consecutive month.

The Bank of Israel stated at that time: The governor and the Bank of Israel make their decisions based solely on professional criteria; high inflation primarily harms the weaker segments of society, and containing it is a necessary condition for healthy economic activity... Financial responsibility, especially at this time, is the order of the day.