Israeli central bank chief pins hopes on ceasefire amid growth shock
The Israeli economy is facing a significant hit to its growth forecasts as a result of the conflict in the Middle East; But Israel’s central bank governor is hopeful that a quick resolution to the wars in Lebanon and Iran could help ease the shock.
Speaking to CNBC’s Karen Tso at the IMF-World Bank spring meeting in Washington, D.C. on Thursday, Bank of Israel Governor Amir Yaron acknowledged that there is still “great uncertainty” about the duration of the conflict despite recent signals that a solution may be on the horizon.
Israel and Lebanon agreed to a 10-day ceasefire following talks between officials from both countries in Washington on Thursday.
Israel reduced its 2026 growth expectation from 5.2 percent to 3.8 percent due to tensions in the Middle East.
But Yaron, speaking shortly before US President Donald Trump declared a temporary ceasefire on Thursday, believes growth could rise to 5.5% in 2027 if these conflicts are resolved.
“That’s a working assumption,” Yaron said.
‘Boots on the ground’
A reduction in hostilities would ease geopolitical risks in Israel, along with the Gulf states, and help boost growth. But Yaron also acknowledged the possibility of a much longer-lasting conflict, saying it would weigh on growth and inflation expectations.
“Markets both at home and in Israel are taking the view that the geopolitical situation has already improved a lot,” he explained, noting the strength in the Israeli stock market, the rise in the shekel and the return of five-year credit default swaps to pre-campaign levels.
By contrast, any escalation of the conflict “will clearly negatively impact growth more than currently anticipated.” Yaron added.
Inflation is expected to be around the low zone of 2% in 2026 and 2027, but Yaron said central bank forecasts remain particularly challenging given ongoing uncertainty.
‘Durability’
But he said the Israeli economy, which has essentially remained in a state of war since the attacks on October 7, 2023, has shown “resilience”, “dynamism” and “agility” in “normalising an otherwise non-normal situation”.
He singled out the Iron Dome and other high-tech products, highlighting the country’s defense and technology sector, where major defense stocks are currently receiving “massive” backorders for their products.
“It’s pretty clear that defense spending around the world will increase over time,” he said. “This industry is doing very well in Israel right now.”
The Bank of Israel kept interest rates steady at its last meeting. Yaron said he signaled the possibility of one or two cuts by the first quarter of next year, assuming the war ends, oil prices ease and reservists return to the economy to ease the labor supply.
“This would be enough to keep inflation in the low 2s through late 2026 and 2027, allowing us to make one or two cuts,” he added. “Of course there is a huge amount of uncertainty. This is not a promise.”
