Bloomberg Audio Studios, podcasts, radio news. We are here at the IMF with the Bank of Israel Governor Amir your own, who is also the economic advisor to the Israeli government governing your own. Thank you so much for being here with us. What a week. It has been quite a different IMF week than usual. What's been your takeaway so.
Far, Lisa, thank you for having me. I think it's clear uncertainty. The global economy seeing exceptional uncertainty. You know, most of the implications are that global trade will decline with it, global growth with declient make probably some tack up in inflation in the US. But the implications are far from clear. A lot of it will depend on what the final situation in terms of tariffs will be, what they're the duration of the uncertainty. But the word
uncertainty is everywhere, and that's the key thing. That uncertainty in itself is weighing in on economy and on decision makers, whether it's companies, whether it's households, investments, and on sentiment.
Earlier this year, you talked about it being very achievable for the Israeli inflation rate to get down between that one and three percent range this year. It's not that far away from it right now. Do you feel like we're still on a path. You're still seeing a path in Israel to that inflation rate enough to cut rates even twice later this year.
So we've grown two percent in twenty three and one percent in twenty four, kind of quite a bit below our our potential, which is around four percent, but the Israeli economy has demonstrated great resiliency, enduring and an immense
shock that we have. We predict that we will grow around three and a half and about four and a half percent in twenty five and twenty six, respectively, and this is after shaving a half percent due to tariffs Israel If I just say Israel's is exposed to the tariffs, but our primary because most of our exports are in the services, our primary focus and the way it can affect us is through the decline in global trade and if we see stock markets sustainably low, also through VC
investment into our high tech area. In terms of the inflation and your question, we've had excess demand basically because of labor shortages. We've seen active demand and we need that process to come into balance. We see that process has started. We predict it will come into balance in the second half of the year, and with it, inflation will also continue to subside into our target, and we penciled in if that happens, we will be able to
do somewhere like around two cuts. That's what the Search Department penciled in, two cuts by within a year from now. But I want to emphasize we are in a great uncertainty is very high, not just because of tariffs. We have our own geopolitical risk surrounding us, and therefore we are very data dependent. If we see this process moving faster, that is inflation decelerating faster, but we want to see inflation sustainably getting into the target, we can move faster.
But on the other hand, if we see inflation sticky and we as market turmoil is happening, we see the shekel depreciate has depreciated, that has an effect on inflation, and if inflation in the US rises, we import some of that inflation. So there's a lot of risks that are tilted up, and if we see inflation stickier, we will have to be restrictive for a longer period.
You know, it's amazing because most Central banks here when I talk about the immense shock, they're talking about tariffs. For you, it's different. There is a war going on. It is the Israel War in Gaza, and there's a real question here about how long it will go on. There was a feeling earlier this year that it was dying down. Now it seems to be inflaming once again. How much does that sort of set back some of these goals of getting people back to the workforce not necessarily deployed elsewhere.
So the numbers that I've stated assume that we are going to be in the coming months in the current level of reserve usage and that will decline over time again in the second half of the year, and that will alleviate some of that labor shortage that we've talked about. We have in our forecast. Also what happens if we see farther escalation that goes on in Gaza, that goes on for another six months and bigger usage of reserves and there we shave an additional half percent of GDP growth.
That's kind of the two scenarios that we've outlaid. But even around those, you can imagine there are many, many other configuration that one can face.
You also are the economic advisor to the government, and I'm sure there are a lot of conversations about how to sustainably keep financing ongoing munitions, ongoing defense efforts, given that it is an uncertain time and given some of the pressures on the economy. You've made the case that it's important to cut spending rather than simply do this by debt financing. Why is that so important to you given the fact that this is a crisis and it is likely to be ongoing.
A Israel is in a situation as you just mentioned, we have a lot of uncertainty that is very related beyond tariffs to the ongoing conflict, and that requires spending, and we want to demonstrate to the world that we continue to have responsible fiscal standing. And that amounts to basically allow even if you allow debt to GDP rise in the current year because of the war, you want to have a credible trajectory that it hasn't inverted u
shape and it comes down. And you got to give the government credit as it did fiscal consolidation of one percent in the twenty twenty four budget and one and a half percent consolidation in the twenty twenty five budget basically according to the Bank of Israel, consistent with the Bank of Israel's recommendation. And of course whether we need to do more down the road will depend also on the geopolitical events and whether how far more will military
spending need to be. But at least right now we can say we do not have a diverging debt to GDP process, and that is I think very important. And we saw it once the ceasefire in Lebanon happened and the budget was approved. We saw the Israeli CDs, the spread between the Israeli bond and US bond decline quite significantly.
As the economic advisor, how important is it for you to see the war come to an end in order to fortify an economy that has been hit by tourism not being as robust as it has been in the past, and questions around ongoing investments in bound despite some of the tech investments.
Let me just say, obviously we all want the hostages first and foremost. Coming back from an economic perspective, we all understand that reducing uncertainty and having at the end some kind of arrangements that provide for a sustainable, secure, situation that will help the economy, not just Israel, the region as a whole, and that will allow us to direct also more energy towards items like education, infrastructure, and enhance potential growth down the road.
Right now, the source of volatility seems to be the United States more broadly at these meetings, and people are grappling with all sorts of uncertainty shocks that you've dealt with before in different capacities, And I'm just wondering whether that's going to stress the Israeli economy as well, based on the volatility and the gyrations in the US market and this sense of lack of clarity around the US role in all of this.
So, first of all, I think everyone understands that uncertainty is weighing on the economy, the global economy, the US economy. We saw the whipsaw in the stock market, Israel's pensions, a lot of them are sitting in the in stock markets. Obviously, our high tech industry is funded a lot by US VC money. So to the extent that uncertainty weighs on those two things, that is also directly affecting our economy through that channel.
What do you get the sense of when you speak to US representatives here, do you get some sense that things are going to calm down anytime soon?
I don't know. I think the major issue is to come to sustainable arrangements and to reduce the uncertainty as fast as one as one can, and I think that will help the economy both here and abroad.
Company, everyone, thank you so much for being with us today. That was Governor Amir Na of the Israeli Central Bank.