WEBVTT - Israel Bank Chief Talks Ceasefire, Economy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>We've got IMF meetings, some.

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<v Speaker 3>Yes, they are underware, the IF, the IMF, the World Bank,

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<v Speaker 3>everybody seemingly meeting in Washington this week, and we've been

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<v Speaker 3>covering all of it. Our colleague Bloomberg Surveillance co host

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<v Speaker 3>Lisa Bromwitz is there. She's done a string of incredible

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<v Speaker 3>interviews and she has another one for us here. Lisa

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<v Speaker 3>will have to hand it over to you.

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<v Speaker 2>Thank you so much. I really appreciate it. I am

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<v Speaker 2>here with the Bank of Israel governor. I'm Mary Rown.

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<v Speaker 2>He does run the central Bank. You also advise on

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<v Speaker 2>financial policy at a time when the mood has clited

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<v Speaker 2>and there is a real sense right now in Israel

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<v Speaker 2>that something significant has shifted. How much can you count

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<v Speaker 2>on the war truly being over when crafting policy right now?

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<v Speaker 1>Well, Lisa, first, thank you for having me again. It's

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<v Speaker 1>important to understand a Israel entered very well. The seventh

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<v Speaker 1>of October. The seventh ob O October did negatively impact

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<v Speaker 1>Israel in significant way, but the Israeli economy throughout these

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<v Speaker 1>two years have shown remarkable resiliency. Now we're seeing that

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<v Speaker 1>if this agreement we hope it proves sustainable that will

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<v Speaker 1>bring sort of a lasting calmness and stability, and those

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<v Speaker 1>are conditions that are definitely can unlock a lot of

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<v Speaker 1>growth rapid recovery, both for Israel and maybe for the

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<v Speaker 1>region at large.

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<v Speaker 2>There's a lot of that has been incurred for during

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<v Speaker 2>this whole endeavor. There's also inflation that's actually come in

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<v Speaker 2>less than expected, which has opened the door. Maybe it's

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<v Speaker 2>the possibility that maybe you could cut rates even before

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<v Speaker 2>the November meeting. Is that a possibility.

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<v Speaker 1>The first thing to say about inflation, Our monetary policy

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<v Speaker 1>has actually proved itself in the sense that, in spite

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<v Speaker 1>of the war, wars are usually inflationary, inflation has converged

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<v Speaker 1>into our target between one and three percent all throughout,

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<v Speaker 1>maintaining financial stability, which of course is very important. This

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<v Speaker 1>was an encouraging CPI that came in. Right now we

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<v Speaker 1>are at two and a half. But there are two

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<v Speaker 1>fundamental forces that are working now with the cessation of

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<v Speaker 1>the fighting. On the one hand, short they're short of

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<v Speaker 1>labor supply that has been there all the time. We're

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<v Speaker 1>going to see probably some release of reserve people, and

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<v Speaker 1>that's going to help reduce inflation. We've seen the shekel

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<v Speaker 1>appreciate part of throughout time, and in particular in the

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<v Speaker 1>last due to the cessation of the ceasefire. Then those

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<v Speaker 1>are basically putting downward pressure on inflation. On the other hand,

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<v Speaker 1>the optimism is potentially bringing a boost to demand. And

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<v Speaker 1>so with these two of setting forces, we want to

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<v Speaker 1>see clarity a little bit on the forces that indeed,

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<v Speaker 1>inflation is converging more firmly, and we have some encouragement

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<v Speaker 1>by the CPI, but we want to see this continues

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<v Speaker 1>to go. And we are because of the uncertainty even

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<v Speaker 1>about the agreements and everything. When we move, we still

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<v Speaker 1>have to move very cautiously.

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<v Speaker 2>There's always uncertainty. Right now globally there's a lot of uncertainty.

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<v Speaker 2>It seems like the uncertainty is so much more heightened

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<v Speaker 2>at a moment when you have been at war for

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<v Speaker 2>more than two years and now there's this question of

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<v Speaker 2>what the permanent situation will be of the Defense Department,

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<v Speaker 2>also what kind of permanent expenditures are going to have

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<v Speaker 2>to be on the government. I'm just wondering if you

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<v Speaker 2>have a sense of that or if that's also one

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<v Speaker 2>of the variables that's up in the air.

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<v Speaker 1>I think it is one of the variables that's up

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<v Speaker 1>in the air. Part of it is we want to

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<v Speaker 1>see that the cease fire and maybe Phase two and

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<v Speaker 1>maybe even other normalization factors. Those will all affect the

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<v Speaker 1>long run expenditures of military potentially at least now, from

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<v Speaker 1>the fact that there is a cease fire and the

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<v Speaker 1>planning was to go and advance longer into Gaza, that

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<v Speaker 1>saves for the short run some fiscal cost. But I

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<v Speaker 1>think this is one of the big assessment in terms

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<v Speaker 1>of our fiscal situation is what are the expenses going forward?

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<v Speaker 1>What is the growth that we can see in the

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<v Speaker 1>coming years given the geo political situation. As I said,

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<v Speaker 1>I think if we see stability, growth will come back.

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<v Speaker 1>Israel tended to grow four percent, We're probably going to

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<v Speaker 1>grow even more than that, at least in the short run.

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<v Speaker 1>Recent economic activity in Israel showed VC money growing, We've

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<v Speaker 1>seen credit card usage quite high. We've seen sentiment and

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<v Speaker 1>trend surveys are being positive. And that's also related to

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<v Speaker 1>your previous question regarding inflation. Why we still have to

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<v Speaker 1>be cautious in how we deal with our monetary policy,

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<v Speaker 1>you know.

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<v Speaker 2>Picking up on the VC flows and some of the

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<v Speaker 2>other inbound flows from overseas. There has been some reputational

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<v Speaker 2>damage that Israel suffered. There have been a number of

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<v Speaker 2>countries that have said that they're going to withdraw investments

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<v Speaker 2>or limited investments into Israel. Have you seen those flows

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<v Speaker 2>start to come back? Do you expect them to? Is

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<v Speaker 2>that something that you're kind of trying to observe right now.

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<v Speaker 1>So first, as I said, the last two quarters, we've

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<v Speaker 1>seen VC money coming in in a very strong way.

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<v Speaker 1>Prior to the ceasefire, we saw some discussions on sanction

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<v Speaker 1>in Israel's is obviously a small open economy. Have to

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<v Speaker 1>do everything in our power to maintain our openness and

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<v Speaker 1>we do that. And I think with the ceasefire and

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<v Speaker 1>the more it lasts, we will see some of this

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<v Speaker 1>reputational risk hopefully get mitigated over time. And that's partly

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<v Speaker 1>why I think this could unlock growth and bring us

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<v Speaker 1>back to our potential and maybe even beyond.

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<v Speaker 2>How big is the range right now in your growth

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<v Speaker 2>that look? I mean, I know it's pretty wide everywhere,

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<v Speaker 2>but for you, it's got to be extreme, extremely significant.

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<v Speaker 1>No. I think if you look at our last analysis

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<v Speaker 1>and that was before the ceasefire agreement. We basically assumed

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<v Speaker 1>that war would kind of end at the beginning of

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<v Speaker 1>twenty twenty six, and we assume that growth of two

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<v Speaker 1>and a half percent in basically twenty five and about

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<v Speaker 1>four point seven in twenty twenty six. And in some sense,

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<v Speaker 1>what has happened now things have shifted one quarter ahead.

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<v Speaker 1>That probably improves slightly twenty twenty five. The big issue

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<v Speaker 1>is twenty twenty six. If this is a lasting agreement,

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<v Speaker 1>and it moreover, if it develops into more normalization, which

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<v Speaker 1>clearly some of President Trumps and US would like to

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<v Speaker 1>get there, that could unlock even more growth in twenty

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<v Speaker 1>twenty six. And be on.

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<v Speaker 2>We're here in Washington, d C. The last time we

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<v Speaker 2>were here, the discussion was all around central bank independence.

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<v Speaker 2>Now it's about a question of detailrization, What is the

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<v Speaker 2>new monetary order? What's been your big takeaway from these

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<v Speaker 2>particular meetings being here.

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<v Speaker 1>I think there's a lot of discussion on digitization and

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<v Speaker 1>stable coins and what that might do to banking and fragility.

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<v Speaker 1>That's one big issue private credit is that risk factors

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<v Speaker 1>are asset market valuations in line, and of course the

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<v Speaker 1>geopolitical uncertainty it's globally and what that might do and

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<v Speaker 1>what that might trigger. I don't think there are definitive answers,

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<v Speaker 1>but those are the things that minds are trying to

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<v Speaker 1>figure out.

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<v Speaker 2>From your perspective, given how significant the tech sector is

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<v Speaker 2>in Israel, how much are you focused on the elevated

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<v Speaker 2>valuations and the potential threat to financial stability, particularly because

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<v Speaker 2>of how dominant that field is in Israel.

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<v Speaker 1>So obviously Israel's locomotive engine is the high tech sector,

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<v Speaker 1>and as I said, it's been very resilient, partly because

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<v Speaker 1>it's very well diversified. Now everybody knows we are extremely

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<v Speaker 1>frontiering cyber but we're also very good in medtech, fintech,

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<v Speaker 1>defense tech. Now with all the investments in defense in

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<v Speaker 1>Europe and otherwise, we have a lot of things to

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<v Speaker 1>offer agro tech. So all these areas gives us a

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<v Speaker 1>very well diversified portfolio of high tech. And obviously in

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<v Speaker 1>the AI there's there's there's a lot of strong valuation.

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<v Speaker 1>We tend to be particularly in more on the applied side.

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<v Speaker 1>Uh So, I think time will tell what those how

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<v Speaker 1>much benefits those new innovations bring in. But I think

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<v Speaker 1>the Israeli sector in general is relatively diversified enough that

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<v Speaker 1>it can withstand even shocks uh to to markets. In

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<v Speaker 1>terms of UH the areas it is particularly.

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<v Speaker 2>Placed in, Governor your own Thank you so much for

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<v Speaker 2>taking the time. Always a pleasure that was, Governor Amir,

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<v Speaker 2>your own of the Bank of Israel,