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We've got IMF meetings, some.
Yes, they are underware, the IF, the IMF, the World Bank, everybody seemingly meeting in Washington this week, and we've been covering all of it. Our colleague Bloomberg Surveillance co host Lisa Bromwitz is there. She's done a string of incredible interviews and she has another one for us here. Lisa will have to hand it over to you.
Thank you so much. I really appreciate it. I am here with the Bank of Israel governor. I'm Mary Rown. He does run the central Bank. You also advise on financial policy at a time when the mood has clited and there is a real sense right now in Israel that something significant has shifted. How much can you count on the war truly being over when crafting policy right now?
Well, Lisa, first, thank you for having me again. It's important to understand a Israel entered very well. The seventh of October. The seventh ob O October did negatively impact Israel in significant way, but the Israeli economy throughout these
two years have shown remarkable resiliency. Now we're seeing that if this agreement we hope it proves sustainable that will bring sort of a lasting calmness and stability, and those are conditions that are definitely can unlock a lot of growth rapid recovery, both for Israel and maybe for the region at large.
There's a lot of that has been incurred for during this whole endeavor. There's also inflation that's actually come in less than expected, which has opened the door. Maybe it's the possibility that maybe you could cut rates even before the November meeting. Is that a possibility.
The first thing to say about inflation, Our monetary policy has actually proved itself in the sense that, in spite of the war, wars are usually inflationary, inflation has converged into our target between one and three percent all throughout, maintaining financial stability, which of course is very important. This was an encouraging CPI that came in. Right now we are at two and a half. But there are two fundamental forces that are working now with the cessation of
the fighting. On the one hand, short they're short of labor supply that has been there all the time. We're going to see probably some release of reserve people, and that's going to help reduce inflation. We've seen the shekel appreciate part of throughout time, and in particular in the last due to the cessation of the ceasefire. Then those are basically putting downward pressure on inflation. On the other hand,
the optimism is potentially bringing a boost to demand. And so with these two of setting forces, we want to see clarity a little bit on the forces that indeed, inflation is converging more firmly, and we have some encouragement by the CPI, but we want to see this continues to go. And we are because of the uncertainty even about the agreements and everything. When we move, we still have to move very cautiously.
There's always uncertainty. Right now globally there's a lot of uncertainty. It seems like the uncertainty is so much more heightened at a moment when you have been at war for more than two years and now there's this question of what the permanent situation will be of the Defense Department, also what kind of permanent expenditures are going to have to be on the government. I'm just wondering if you have a sense of that or if that's also one of the variables that's up in the air.
I think it is one of the variables that's up in the air. Part of it is we want to see that the cease fire and maybe Phase two and maybe even other normalization factors. Those will all affect the long run expenditures of military potentially at least now, from the fact that there is a cease fire and the planning was to go and advance longer into Gaza, that
saves for the short run some fiscal cost. But I think this is one of the big assessment in terms of our fiscal situation is what are the expenses going forward? What is the growth that we can see in the coming years given the geo political situation. As I said, I think if we see stability, growth will come back. Israel tended to grow four percent, We're probably going to grow even more than that, at least in the short run. Recent economic activity in Israel showed VC money growing, We've
seen credit card usage quite high. We've seen sentiment and trend surveys are being positive. And that's also related to your previous question regarding inflation. Why we still have to be cautious in how we deal with our monetary policy, you know.
Picking up on the VC flows and some of the other inbound flows from overseas. There has been some reputational damage that Israel suffered. There have been a number of countries that have said that they're going to withdraw investments or limited investments into Israel. Have you seen those flows start to come back? Do you expect them to? Is that something that you're kind of trying to observe right now.
So first, as I said, the last two quarters, we've seen VC money coming in in a very strong way. Prior to the ceasefire, we saw some discussions on sanction in Israel's is obviously a small open economy. Have to do everything in our power to maintain our openness and we do that. And I think with the ceasefire and the more it lasts, we will see some of this
reputational risk hopefully get mitigated over time. And that's partly why I think this could unlock growth and bring us back to our potential and maybe even beyond.
How big is the range right now in your growth that look? I mean, I know it's pretty wide everywhere, but for you, it's got to be extreme, extremely significant.
No. I think if you look at our last analysis and that was before the ceasefire agreement. We basically assumed that war would kind of end at the beginning of twenty twenty six, and we assume that growth of two and a half percent in basically twenty five and about four point seven in twenty twenty six. And in some sense, what has happened now things have shifted one quarter ahead. That probably improves slightly twenty twenty five. The big issue
is twenty twenty six. If this is a lasting agreement, and it moreover, if it develops into more normalization, which clearly some of President Trumps and US would like to get there, that could unlock even more growth in twenty twenty six. And be on.
We're here in Washington, d C. The last time we were here, the discussion was all around central bank independence. Now it's about a question of detailrization, What is the new monetary order? What's been your big takeaway from these particular meetings being here.
I think there's a lot of discussion on digitization and stable coins and what that might do to banking and fragility. That's one big issue private credit is that risk factors are asset market valuations in line, and of course the geopolitical uncertainty it's globally and what that might do and what that might trigger. I don't think there are definitive answers, but those are the things that minds are trying to figure out.
From your perspective, given how significant the tech sector is in Israel, how much are you focused on the elevated valuations and the potential threat to financial stability, particularly because of how dominant that field is in Israel.
So obviously Israel's locomotive engine is the high tech sector, and as I said, it's been very resilient, partly because it's very well diversified. Now everybody knows we are extremely frontiering cyber but we're also very good in medtech, fintech, defense tech. Now with all the investments in defense in Europe and otherwise, we have a lot of things to offer agro tech. So all these areas gives us a
very well diversified portfolio of high tech. And obviously in the AI there's there's there's a lot of strong valuation. We tend to be particularly in more on the applied side. Uh So, I think time will tell what those how much benefits those new innovations bring in. But I think the Israeli sector in general is relatively diversified enough that it can withstand even shocks uh to to markets. In terms of UH the areas it is particularly.
Placed in, Governor your own Thank you so much for taking the time. Always a pleasure that was, Governor Amir, your own of the Bank of Israel,