Israel Finance Minister admits pressure on economy amid Gaza war

JERUSALEM: Israeli Finance Minister Bezalel Smotrich said on Thursday he would lower taxes if the central bank did not begin to reduce interest rates.

Speaking at a meeting with the presidency of the business sector, Smotrich said he sought to “reduce the pressure on the economy”, which has been hurt by Israel’s nearly two-year war with Hamas militants in Gaza.

Bank of Israel Governor Amir Yaron “should have lowered interest rates six months ago”, Smotrich said in a video seen by Reuters. “If the governor doesn’t lower interest rates, I will lower taxes.”

In response, the Bank of Israel said the governor and policymakers made decisions purely on professional criteria.

“High inflation primarily harms the weaker segments of society, and restraining it is a necessary condition for proper economic activity,” the central bank said. “Fiscal responsibility, especially during these times, is of the utmost importance.”

Yaron has frequently criticised a spike in spending to finance the war that was not met with sufficient budget cuts and tax increases to prevent a rise in the budget deficit and public debt burden.

Rating agencies last year cut Israel’s credit rating as a result.

Smotrich stressed that Yaron and the Bank of Israel’s independence was critical and that, while Yaron was responsible for monetary policy, he was responsible for fiscal policies.

“I have absolutely no intention of interfering with him, and I will not let anyone interfere with him, but … I think he is wrong. Being conservative is not wise,” Smotrich said.

The Bank of Israel last month held its benchmark lending rate at 4.5% for a 13th straight time, with its last move a quarter-point cut in January of 2024 at the outset of the war.

Even as Israel’s risk premium has fallen since a 12-day war with Iran, Yaron has said he wanted to see clear signs of inflation converging into the government’s 1-3% target range before lowering interest rates. The annual inflation rate eased to 3.1% in July from 3.3% in June.

Israel’s economy contracted an annualised 3.5% in the second quarter from the prior three months.