1 00:00:02,520 --> 00:00:07,080 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,480 --> 00:00:10,080 Speaker 2: The past weeks and months have been dominated by discussions 3 00:00:10,119 --> 00:00:12,360 Speaker 2: about unrest in the Middle East, and at the epicenter 4 00:00:12,720 --> 00:00:14,680 Speaker 2: of all it of it has been Israel, which has 5 00:00:14,720 --> 00:00:17,640 Speaker 2: been fighting wars on multiple fronts, the latest being direct 6 00:00:17,640 --> 00:00:22,160 Speaker 2: confrontation with Iran that is at least ended for now 7 00:00:22,200 --> 00:00:26,200 Speaker 2: with a ceasefire agreement. For discussion on the economic ramifications 8 00:00:26,280 --> 00:00:29,160 Speaker 2: of the latest conflict, we bring in Bank of Israel, 9 00:00:29,200 --> 00:00:31,840 Speaker 2: Governor Amir, your own governor, your own Thank you so 10 00:00:31,920 --> 00:00:33,879 Speaker 2: much for taking the time to speak with us. I 11 00:00:33,920 --> 00:00:36,839 Speaker 2: want to start with the economic cost of some of 12 00:00:36,880 --> 00:00:39,880 Speaker 2: the conflicts. Do you have an estimate of how much 13 00:00:40,240 --> 00:00:42,960 Speaker 2: the latest war with Iran has tallied up to? 14 00:00:44,880 --> 00:00:47,720 Speaker 1: Lisa, thank you for having me again on your show. 15 00:00:48,159 --> 00:00:50,920 Speaker 1: Let me just start by saying, first of all, Israel 16 00:00:50,960 --> 00:00:55,800 Speaker 1: has shown immense resiliency through the horrific day of the 17 00:00:55,840 --> 00:01:03,480 Speaker 1: seventh of October. We have shown recovery since then. In fact, 18 00:01:03,560 --> 00:01:07,959 Speaker 1: in the past quarter we grew just around our potential, 19 00:01:08,000 --> 00:01:12,399 Speaker 1: which is about four percent. We've seen investment coming up, 20 00:01:12,800 --> 00:01:18,720 Speaker 1: VC money, FDI, and nonetheless, we are still obviously quite 21 00:01:18,800 --> 00:01:21,240 Speaker 1: away from where we would have been had this seventh 22 00:01:21,240 --> 00:01:28,360 Speaker 1: of October not happen. Now, regarding the campaign with Iran 23 00:01:28,760 --> 00:01:35,680 Speaker 1: and its nuclear threat, first, I should say, obviously there's 24 00:01:35,760 --> 00:01:41,880 Speaker 1: been lives taken, structure damaged, and the budgetary cost regarding 25 00:01:41,920 --> 00:01:46,960 Speaker 1: your question is around one percent of GDP. That includes 26 00:01:47,000 --> 00:01:52,960 Speaker 1: compensation to workers, to structures, and the actual military cost. 27 00:01:53,920 --> 00:01:58,520 Speaker 1: Regarding that campaign, again, I should say the home front 28 00:01:58,760 --> 00:02:02,160 Speaker 1: should be commanded on its resiliency. What we are seeing 29 00:02:02,560 --> 00:02:09,400 Speaker 1: already today is workers, merchants, workplaces coming back to their 30 00:02:09,440 --> 00:02:12,120 Speaker 1: regular activity quickly. 31 00:02:13,120 --> 00:02:14,840 Speaker 3: So that's on that front. 32 00:02:14,960 --> 00:02:18,760 Speaker 1: I would say what we're seeing in markets is that 33 00:02:18,960 --> 00:02:24,359 Speaker 1: markets are telling us that Israel's geopolitical risk has been 34 00:02:24,400 --> 00:02:28,840 Speaker 1: significantly reduced. We're seeing it through the improvements or the 35 00:02:28,919 --> 00:02:31,880 Speaker 1: appreciation of the shekel. We are seeing it through the 36 00:02:32,000 --> 00:02:38,480 Speaker 1: reduction in the CDs of Israel, and so all those 37 00:02:38,600 --> 00:02:43,320 Speaker 1: signs are positioning us if this continues, if the ceasefires 38 00:02:43,360 --> 00:02:49,519 Speaker 1: continues to go on into better economic activity down the road. 39 00:02:49,600 --> 00:02:54,000 Speaker 1: Of course, we still have the Gaza and the hostages 40 00:02:54,160 --> 00:02:57,320 Speaker 1: as an open issue that is weighing on the economy, 41 00:02:57,760 --> 00:03:02,160 Speaker 1: but the current geopolitical situation and what markets are telling 42 00:03:02,240 --> 00:03:05,880 Speaker 1: us is that they are seeing the campaign that has 43 00:03:05,960 --> 00:03:10,320 Speaker 1: been done Visa vi Iran as a positive outcome for Israel. 44 00:03:10,320 --> 00:03:12,600 Speaker 2: Governor your own. There's a lot to unpack there. I 45 00:03:12,639 --> 00:03:15,480 Speaker 2: want to start with just sort of the ongoing campaign 46 00:03:15,639 --> 00:03:18,560 Speaker 2: or the ongoing war in Gaza, as well as just 47 00:03:18,840 --> 00:03:22,120 Speaker 2: going forward over a medium term, whether you see Israel 48 00:03:22,160 --> 00:03:25,160 Speaker 2: as having to ramp up defense spending for a longer 49 00:03:25,200 --> 00:03:28,920 Speaker 2: period of time due to ongoing threats, even though for 50 00:03:29,040 --> 00:03:31,880 Speaker 2: right now we are talking about a ceasefire between Israel 51 00:03:31,919 --> 00:03:35,520 Speaker 2: and Iran, how much you penciling in increase defense spending 52 00:03:35,680 --> 00:03:38,960 Speaker 2: as a constant going forward rather than something that really 53 00:03:39,000 --> 00:03:40,119 Speaker 2: is short and medium term. 54 00:03:42,240 --> 00:03:47,400 Speaker 1: It's an excellent question. I would say Israel has demonstrated 55 00:03:48,920 --> 00:03:55,160 Speaker 1: its commitment to fiscal responsible standing, and in the last 56 00:03:55,160 --> 00:03:59,440 Speaker 1: two years, which obviously involved a lot of increased defense spending, 57 00:03:59,800 --> 00:04:05,000 Speaker 1: the government did two major fiscal consolidation steps, both in 58 00:04:05,040 --> 00:04:07,960 Speaker 1: the twenty four and the twenty five budgets, on the 59 00:04:08,080 --> 00:04:11,520 Speaker 1: order of one percent and one and a half percent, respectively. 60 00:04:11,600 --> 00:04:14,960 Speaker 1: This is a non trivial step in order to signal 61 00:04:15,000 --> 00:04:19,480 Speaker 1: to the markets that our debt to GDP basically is 62 00:04:19,520 --> 00:04:23,800 Speaker 1: not going to diverge over time, and in fact, over 63 00:04:23,880 --> 00:04:29,200 Speaker 1: time should have a downward trajectory. Now, given the extra 64 00:04:29,320 --> 00:04:33,680 Speaker 1: cost that I just mentioned with the Iranian campaign and 65 00:04:33,839 --> 00:04:39,359 Speaker 1: the ongoing Gaza situation on the one hand, but the 66 00:04:39,480 --> 00:04:45,400 Speaker 1: fact that perhaps geopolitical situation has been improved, Israel is 67 00:04:45,400 --> 00:04:51,159 Speaker 1: going to have to reassess its priorities regarding balancing civilian 68 00:04:51,200 --> 00:04:58,040 Speaker 1: expenditures defense expenditures in order to maintain this responsible fiscal 69 00:04:58,080 --> 00:04:59,320 Speaker 1: standing going forward. 70 00:05:00,160 --> 00:05:03,200 Speaker 2: So if you talk about having to balance a budget 71 00:05:03,320 --> 00:05:06,720 Speaker 2: rather than just simply increasing debt, do you see the 72 00:05:06,760 --> 00:05:10,880 Speaker 2: defense spending as being a bigger proportion overall and there 73 00:05:10,920 --> 00:05:12,599 Speaker 2: have to be some fiscal restraint. I mean, I'm just 74 00:05:12,640 --> 00:05:16,440 Speaker 2: wondering how you're thinking about the budget. As you know 75 00:05:16,520 --> 00:05:18,960 Speaker 2: the head of the financial aspect as well as your 76 00:05:19,040 --> 00:05:21,080 Speaker 2: role as the head of the Central Bank, we have 77 00:05:21,120 --> 00:05:23,599 Speaker 2: to decide what your response is to that on the 78 00:05:23,640 --> 00:05:25,200 Speaker 2: right side. 79 00:05:26,000 --> 00:05:29,800 Speaker 1: So first of all, for the twenty twenty five, will 80 00:05:29,839 --> 00:05:35,560 Speaker 1: probably have to open the budget and increase it somewhat. 81 00:05:35,920 --> 00:05:39,800 Speaker 1: But what I was referring to going forward, you know 82 00:05:39,880 --> 00:05:44,160 Speaker 1: the decision makers and partly once we know better how things, 83 00:05:44,560 --> 00:05:50,560 Speaker 1: how the dust exactly settles. When I talk about reassessing 84 00:05:50,680 --> 00:05:57,120 Speaker 1: priority if the geopolitical situation has improved. It will allow 85 00:05:57,839 --> 00:06:03,839 Speaker 1: perhaps some shifting between defense spending civilian spending, and maybe 86 00:06:05,000 --> 00:06:11,840 Speaker 1: less increases in defense spending that were in line. There 87 00:06:11,920 --> 00:06:13,919 Speaker 1: was a special committee which I was one of the 88 00:06:13,960 --> 00:06:19,279 Speaker 1: advocates for it, after the seventh of October, to assess 89 00:06:19,360 --> 00:06:24,160 Speaker 1: spending ten years out, and this perhaps should be reassessed 90 00:06:24,520 --> 00:06:30,560 Speaker 1: given what has happened with the campaign against the nuclear 91 00:06:30,600 --> 00:06:31,400 Speaker 1: threat to Iran. 92 00:06:31,720 --> 00:06:34,120 Speaker 3: So whether spending goes up. 93 00:06:36,320 --> 00:06:42,119 Speaker 1: For defense is something that should be reassessed, and even 94 00:06:42,160 --> 00:06:47,320 Speaker 1: if it's not, even if it's not immediate, perhaps in 95 00:06:47,440 --> 00:06:53,200 Speaker 1: terms of smoothing it over time, some of these new 96 00:06:53,279 --> 00:06:58,360 Speaker 1: geopolitical events may provide such opportunities, but all of that 97 00:06:58,480 --> 00:07:01,799 Speaker 1: has to be reassessed as we are going forward. 98 00:07:01,920 --> 00:07:04,640 Speaker 2: Governor your own you also mentioned the appreciation of the 99 00:07:04,680 --> 00:07:08,000 Speaker 2: shekel as sort of a global vote on greater security 100 00:07:08,000 --> 00:07:10,400 Speaker 2: in the region as you're referring to, that could potentially 101 00:07:11,000 --> 00:07:13,840 Speaker 2: loosen up some of the requirements on defense spending. I 102 00:07:13,920 --> 00:07:17,480 Speaker 2: just wonder if as the central bank governor, you see 103 00:07:17,680 --> 00:07:20,480 Speaker 2: the appreciation of the shekel as allowing you to cut 104 00:07:20,520 --> 00:07:25,600 Speaker 2: rates as possibly reduce inflationary forces from imports. 105 00:07:26,720 --> 00:07:31,360 Speaker 1: So darn right now, probably two vectors that are operating 106 00:07:31,440 --> 00:07:33,760 Speaker 1: in somewhat opposite direction. 107 00:07:33,880 --> 00:07:35,960 Speaker 3: On the one hand, as you mentioned. 108 00:07:36,040 --> 00:07:41,240 Speaker 1: The appreciation of the shekel pushes things, holding everything else 109 00:07:41,280 --> 00:07:49,120 Speaker 1: equal towards reducing inflation. On the other hand, if what 110 00:07:49,160 --> 00:07:51,480 Speaker 1: we are seeing with the shekel is also a reflection 111 00:07:51,680 --> 00:07:58,200 Speaker 1: of indeed better geopolitical view of Israel, that will increased investment, 112 00:07:58,360 --> 00:08:01,720 Speaker 1: will increase demand, and right now we are still facing 113 00:08:02,800 --> 00:08:06,160 Speaker 1: shortages on the labor side on labor supply. 114 00:08:06,280 --> 00:08:07,800 Speaker 3: This is something that I've mentioned in. 115 00:08:07,760 --> 00:08:11,120 Speaker 1: The past, and that of course is putting some pressure 116 00:08:11,440 --> 00:08:14,800 Speaker 1: on inflation. Which of these two kind of comes out 117 00:08:16,320 --> 00:08:20,400 Speaker 1: and at what phase is still hard to know it 118 00:08:20,480 --> 00:08:25,920 Speaker 1: at this point, and therefore we have to work cautiously, 119 00:08:27,280 --> 00:08:30,280 Speaker 1: and we are going to continue to work as we've 120 00:08:30,320 --> 00:08:34,720 Speaker 1: done in the recent past, because inflation has been very volatile. 121 00:08:35,559 --> 00:08:40,600 Speaker 1: Air fares moved, for example, inflation up by surprisingly a 122 00:08:40,600 --> 00:08:44,080 Speaker 1: half percentage point. The following months it kind of dropped, 123 00:08:44,360 --> 00:08:48,960 Speaker 1: so we have to work cautiously using a data dependent 124 00:08:49,040 --> 00:08:52,360 Speaker 1: approach as we go along. We still think that a 125 00:08:52,480 --> 00:08:57,280 Speaker 1: year out we should see the general fundamental forces pushing 126 00:08:57,320 --> 00:08:59,120 Speaker 1: inflation down. 127 00:08:59,679 --> 00:09:00,800 Speaker 3: But but. 128 00:09:02,240 --> 00:09:05,680 Speaker 1: What is happening in sort of in the shorter run 129 00:09:06,080 --> 00:09:11,240 Speaker 1: is hard to tell given these forces that I just mentioned. 130 00:09:11,240 --> 00:09:13,920 Speaker 2: You talk about governor your rown, the prospect of a 131 00:09:13,920 --> 00:09:19,360 Speaker 2: better geopolitical backdrop in the region, providing not only a 132 00:09:19,400 --> 00:09:22,720 Speaker 2: boost reducing your need to spend for defense, but also 133 00:09:22,720 --> 00:09:27,240 Speaker 2: potentially providing a boost for regional travel for business. I mean, 134 00:09:27,280 --> 00:09:30,679 Speaker 2: what's your base case or and what's your some of 135 00:09:30,720 --> 00:09:35,440 Speaker 2: your tail risks in terms of entail benefits from how 136 00:09:35,520 --> 00:09:38,400 Speaker 2: much the situation has changed in the past week. 137 00:09:40,559 --> 00:09:42,679 Speaker 3: So we are. 138 00:09:44,440 --> 00:09:47,880 Speaker 1: We have basically a forecast that is from April. We're 139 00:09:47,920 --> 00:09:50,720 Speaker 1: going to go to an official forecast in our next 140 00:09:50,800 --> 00:09:55,800 Speaker 1: interest rate meeting. But I would say, in general, we 141 00:09:55,960 --> 00:09:59,640 Speaker 1: think the geopolitical events are such that they are going 142 00:09:59,679 --> 00:10:04,960 Speaker 1: to pro wide as you say, more investments in Israel, 143 00:10:05,480 --> 00:10:11,480 Speaker 1: in Israel, better business opportunity. But if we go farther 144 00:10:11,600 --> 00:10:14,719 Speaker 1: down the line, if this situation is sort of an 145 00:10:14,720 --> 00:10:21,079 Speaker 1: opening to somehow closing the situation in Gaza, where there 146 00:10:21,160 --> 00:10:28,200 Speaker 1: is sustainable security solution there for Israel, and if other 147 00:10:28,480 --> 00:10:33,400 Speaker 1: arrangements and agreements and expansion of the Abraham's Accord are 148 00:10:33,480 --> 00:10:37,880 Speaker 1: down the road, that of course opens up even bigger 149 00:10:38,800 --> 00:10:43,560 Speaker 1: economic prospects down the road. They're not in our models 150 00:10:43,640 --> 00:10:48,480 Speaker 1: right now. But those are things that you know clearly 151 00:10:48,920 --> 00:10:52,760 Speaker 1: some people are are are putting and thinking about down 152 00:10:52,760 --> 00:10:56,000 Speaker 1: the road. There's just too much uncertainty how things will 153 00:10:56,040 --> 00:11:01,000 Speaker 1: develop in the near future, Governor Or, what do you have. 154 00:11:00,960 --> 00:11:04,360 Speaker 2: To see in terms of around in Israel, some sort 155 00:11:04,400 --> 00:11:07,360 Speaker 2: of further pact. What do you have to see to 156 00:11:07,400 --> 00:11:09,800 Speaker 2: make that more of a base case to understand that 157 00:11:09,840 --> 00:11:12,480 Speaker 2: there is a more secure environment. 158 00:11:15,280 --> 00:11:21,079 Speaker 3: I think, first of all, you know the fact that. 159 00:11:22,320 --> 00:11:28,640 Speaker 1: The campaign against the Iranian nuclear threat, at least as 160 00:11:30,320 --> 00:11:34,360 Speaker 1: presented by both President Trump and Prime Minister in NATANIAO 161 00:11:35,960 --> 00:11:39,600 Speaker 1: this dismantled that threat. That's an important issue in the 162 00:11:39,640 --> 00:11:45,920 Speaker 1: markets are sort of showing it by both by as 163 00:11:46,320 --> 00:11:48,840 Speaker 1: I mentioned, by the CDs and the Shekel. I think 164 00:11:48,880 --> 00:11:52,240 Speaker 1: the next issue that is weighing on the economy right 165 00:11:52,280 --> 00:11:58,880 Speaker 1: now is putting some kind of resolution to the Gaza 166 00:11:59,320 --> 00:12:04,160 Speaker 1: and the hostile hopefully getting the hostages back situation. Once 167 00:12:05,720 --> 00:12:12,720 Speaker 1: that gets resolved in a sustainable manner, we will have 168 00:12:12,800 --> 00:12:19,720 Speaker 1: a clear path for Israel going back to its potential 169 00:12:19,800 --> 00:12:23,559 Speaker 1: trajectory for growth and maybe even doing some catching up 170 00:12:24,520 --> 00:12:28,320 Speaker 1: through the losses that have happened in the year and 171 00:12:28,440 --> 00:12:32,359 Speaker 1: nine months since that has happened since the seventh of October.