According to a report on the New York Times website on October 23, the Bank of Israel stated on the 23rd that the war between Israel and Hamas will lead to a sudden slowdown in the Israeli economy this year and next, leading to a surge in the country's budget deficit as the country increases spending to support the military, civilians, and businesses during the conflict.
Many businesses have been forced to suspend operations, and hundreds of thousands of Israeli reserve soldiers are serving. At the same time, many people live in shelters. The Bank of Israel released a report after its first currency meeting since the outbreak of the conflict, stating that assuming the war continues on the southern front of Israel, the country's economic growth rate will drop to 2.3% this year and 2.8% in 2024. In August, the Bank also predicted an economic growth rate of 3% for both this year and the next.
Amir Yaron, the governor of the Bank of Israel (Bank of Israel), said at a press conference in Jerusalem: "In the past, we knew how to recover during difficult times, and I have no doubt that this will also be the case." He also said that even so, "it is clear that the shortening or prolongation of the duration of the war, as well as the spread of the war to other fields, will add uncertainty to the economic outlook.
This conflict has dealt a new blow to an economy that has until recently been hailed as an entrepreneurial powerhouse. Israel has low debt, a current account surplus, and high foreign exchange reserves. But with high interest rates, rising inflation, and expectations of a global economic slowdown, the country's growth has begun to slow down.
The Bank of Israel stated in its report that Israel's financial markets are functioning normally and most of the country's economic activity is still "as usual".
However, after the outbreak of the war, the Israeli currency, the New Shekel (which has been declining since the beginning of this year), further fell to an 8-year low, prompting the central bank to allocate $30 billion in foreign exchange to support it. On the 23rd, the new shekel fell another 0.1% against the US dollar.
Two credit rating agencies warned last week that Israel's debt rating may be downgraded, depending on the severity and duration of the conflict. But the Bank of Israel stated on the 23rd that the country's banking system is "still stable and sound".
The Israeli central bank has always faced a dilemma: whether to lower interest rates to help boost the wartime economy, or to keep interest rates high to support the new shekel exchange rate. On the 23rd, the central bank chose the latter: to maintain interest rates unchanged, and stated that its policy focus is on "stabilizing the market and reducing uncertainty".
The proportion of Israeli debt in the economy is expected to significantly increase, reflecting an increase in defense spending, including the financial support required for what the central bank calls "war against established goals".
The Bank of Israel also said that as the economy is impacted and people are mobilized to join the war, tax revenue is expected to decline. The central bank stated that consumer spending and activities in the construction, agriculture, and tourism industries have been decreasing.
At the same time, the government has promised to invest more funds to support the people and businesses, including providing housing for those evacuated from the war zone. The government will also provide subsidies and loans to small and medium-sized enterprises. Nevertheless, the Bank of Israel stated that there is still a high level of uncertainty regarding the outlook.