BoI governor: Interest rate cuts will be measured and gradual

“The interest rate cut is another in a series of measures and clear signs – Israel is on its way to tremendous economic growth,” is how Minister of Finance Bezalel Smotrich responded to the decision by the Bank of Israel Monetary Committee yesterday to cut the bank’s interest rate by 0.25% to 4.25%.

Market analysts do not see yesterday’s interest rate cut as sufficient to boost the economy, and are pinning hopes on a continuation of the trend, but for the minister of finance the move has political significance as elections draw near. It now remains to be seen whether political pressures on the Bank of Israel will continue. Smotrich added criticism of the governor of the Bank of Israel, saying that the interest rate cut should have come six months ago, and should have been deeper.

“We are after several years in which the government debt:GDP ratio has risen, and despite this we retained the confidence of the markets,” Governor of the Bank of Israel Amir Yaron said in an interview with “Globes” after the interest rate announcement. “This happened thanks to budget adjustments, and we managed to convey the message that after the intensity of the fighting diminished, the debt:GDP ratio would start to fall. Therefore, the first principle is that the 2026 budget framework should lead to a substantial fall in the debt:GDP ratio,” Yaron said, in effect placing responsibility for creating room for further interest rate cuts on Smotrich himself.

What should the fiscal deficit be if we are to achieve a fall in the ratio?

“I would say a little over 3% of GDP. A second principle is as many growth engines as possible, and taking money away from places that do not support growth, such as negative incentives to work or acquire education with skills suited to the labor market.”

A further principle that Yaron cited was maintaining a balance when it comes to the defense budget. “We know that the economy needs security, but security also needs the economy,” he said. “On the one hand, the defense budget must be constructed in accordance with the up-to-date map of threats, but in the other hand it must have in view all the needs of the economy.”

The army is demanding mobilization of 60,000 reserve soldiers. How do you see that demand?

“The prime minister and the other decision makers will have to discuss the matter against the current map of threats and try to find some way of reducing the defense budget.”

Yaron went on to cool the expectations of anyone hoping for a further interest rate cut when the Monetary Committee meets again in January. “We still need to be extra cautious, and so interest rate reductions will be measured and gradual,” he said. “We will have to behave carefully in a considered way. Both in Israel and around the world, it does not look as though in the coming years interest rate levels will fall to the zero levels we saw before the Covid epidemic.

“The latest forecast of the Bank of Israel Research Department, from September, predicts that the interest rate will be 3.75% by next September. We will of course carry out a revised forecast, but for the time being that certainly looks like a reasonable interest rate environment.”

The banks tax

One of the biggest bones of contention between the Bank of Israel and the government at present is the initiative to impose a new tax on the banks. The prime minister’s economic adviser, Prof. Avi Simhon, is even trying to advance a measure whereby the new tax will serve to subsidize mortgages, which have become much more expensive because of the sharp interest rate rise since 2022.

Last week, a joint Ministry of Finance and Bank of Israel team on the question of a special tax on the banks, which have posted spectacular profits thanks to the high interest rate, published its conclusions for public comment. The team sets out advantages and disadvantages of a special tax on the banks, but refrains from making an explicit recommendation one way or the other.

In the interview with him, Yaron did not express opposition to the team’s report, but his many reservations about the tax idea are sufficient to give an impression of his stance. “Sectoral taxation is something that we see as problematic, and we have said so for a long time,” he said. “And so if super-profits are going to be taxed, distortions need to be avoided.”

Yaron added that taxation of this kind was liable to lead to image problems internationally. “It will be a negative incentive for financial institutions to enter this sector. We must be very careful, In a situation like this there has to be a committee of experts that examines the matter in depth, something along the lines of the Sheshinski committee (which examined taxation of gas exploration companies) that can look at the sector in relation to all sectors.

“To the best of my understanding, the current bill speaks of a temporary provision. At least it’s not going in the direction of something permanent. We too, although we had representatives on the team, still want to examine the specific proposals further, even for a temporary measure.”

Published by Globes, Israel business news – en.globes.co.il – on November 25, 2025.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.