Report: The Israeli economy needs a rapid and sharp cut in interest rates

SadaNews Economy Translation: Yedioth Ahronoth newspaper published an analytical report confirming that a rapid and sharp interest rate cut could be the most important step to revitalize economic activity in Israel, amidst the Israeli occupation government's hesitation to take direct measures to support the Israeli market. It stated: "There remains only one important factor in the arena that can stop the deterioration, which is the Bank of Israel."

The Monetary Committee of the Bank of Israel will meet in the coming days to make a fateful decision regarding the interest rate, amid expectations that the governor will announce a cut on the 25th of this month.

The report indicates that even a slight reduction could demonstrate the central bank's courage, but what is actually required is a larger and bolder cut to save the economy from the repercussions of the war that has been ongoing for 31 months, according to Yedioth Ahronoth's report.

After months of keeping the interest rate stable at 4.0%, pressure is increasing on the governor to cut it by half a percentage point to 3.5%. This reduction, according to economic experts, will reduce financing costs and encourage the necessary investments for small and medium-sized enterprises that are struggling to survive and repay their debts. It will also facilitate contractors' work, speed up troubled projects in the housing sector, and enhance real growth while keeping inflation within the targeted range (1.9%-2.2%).

Potential Risks

However, the report, as translated by SadaNews, does not overlook the potential risks that may arise from this step, including a decline in the value of the shekel against the dollar and the euro, raising the prices of imported products and reigniting inflation. The state of geopolitical instability remains a pressing factor, as the economy operates under a high "risk premium" that could worsen with any sudden security developments. Additionally, the government budget deficit, which is nearing 5%, is expected to increase due to the ongoing war in Lebanon.

Direct Impact on Families and Businesses

Yedioth states in its report: "If interest rates are cut, it will ease mortgage loan burdens on millions of families and revive the business sector suffering from the weight of war and high interest. However, if this step fails, the economy may enter a new inflationary spiral requiring a more painful interest rate hike later."

The report concludes that Bank of Israel Governor Amir Yaron is faced with a difficult choice: either protect the shekel from declining or be the main engine for reviving the economy.

It adds: "A bold step of cutting half a percentage point at once would be considered a positive surprise and would show the central bank's confidence in the resilience of the economy despite the Israeli government's inaction."