Contrary to claims made by several senior economic officials, Bank of Israel Governor Prof. Amir Yaron does not believe Monday’s quarter-point interest rate cut came too late. “Economic conditions in Israel justified a rate reduction only now, and we will continue to act responsibly and according to future developments,” he told ynet in an interview.

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נגיד בנק ישראל, פרופ' אמיר ירוןנגיד בנק ישראל, פרופ' אמיר ירון

Bank of Israel Governor Prof. Amir Yaron

(Photo: Alex Kolomoisky)

‘A rapid correction would be painful’

Will this be a one-time cut or the start of a series?
“We still need a measured, gradual and balanced policy. Uncertainty remains high. We see lively activity in the economy, strong demand, rising wages and low unemployment.”

Does that mean the interest rate will not fall again soon?
“We will examine all the data. A correction that is too rapid would be more painful. Lowering the rate too quickly at this stage could lead to renewed inflation. Even if we had acted earlier, it could have caused that outcome. The current data aligned with a cut, and we will continue to reassess as we move forward.”

What about the years ahead? Could rates fall back to the very low levels seen before the COVID-19 pandemic?
“In the coming years, interest rates will likely not return to the levels we saw before COVID. Our latest research forecast puts the interest rate at around 3.75% within a year, compared with 4.5% today. History has taught us that timing is everything, and now was the right moment to act.”

‘Keeping inflation moderate during a war is an achievement’

Do you think Israel’s inflation data are surprisingly positive given the war?
“Yes, and with all due modesty, this is partly thanks to the Bank of Israel’s policy. Wars tend to drive inflation higher, even toward hyperinflation, so caution was essential. Inflation rose only moderately, and that is no small achievement.”

‘A sector-specific bank tax must be handled with tweezers’

Yaron also addressed the Finance Ministry’s decision to impose a new tax on banks. “A sector-specific tax is not desirable,” he said. “If you tax excess profits, it must be done with tweezers. Imposing permanent taxes on excess profits requires deep analysis and clear decisions about how to structure them. We must avoid distortions and negative perceptions. It is good that, for now, this is only a temporary measure.”

He added that any move toward a permanent tax “requires thorough committee work. Such a tax affects all citizens and shareholders, and permanent measures must be taken with utmost care.”

‘The deficit target is correct — but we must reduce the debt ratio’

Asked about the proposed state budget presented by the Finance Ministry, Yaron emphasized the need for fiscal discipline.

“First, we must establish the framework. At the start of 2026, we must be on a path that reduces the debt-to-GDP ratio. The deficit target of just over 3% is appropriate, and we must not increase the debt ratio further.”

Throughout the war, he said, the Bank of Israel influenced fiscal strategy, leading to adjustments equal to about one percent of GDP. “This allowed us to tell investors the debt ratio would decline. But in 2025, the war dragged on and the ratio rose again.”

What is missing in the emerging 2026 budget?
“Right now, the intensity of the fighting is expected to decrease. We need additional growth engines — especially advancing the metro project, transportation and education. We must also remove negative incentives that discourage entering the workforce or acquiring sufficient education. And we must find the right approach for the defense budget, given its significant expansion.”

Ultimately, he said, Israel must align the updated threat map with a fiscal plan that brings the debt-to-GDP ratio down again. “This is extremely important.”