The armaments economy: even the Bank of Israel is afraid of a campaign in the north opinion

The Bank of Israel decided yesterday to leave the interest rate unchanged at 4.5% . In the words of the governor who explained the decision, the following stood out: inflation did decrease, but the macro data is good and the state budget was adjusted.

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In short : inflation has indeed converged within the government target, which ranges from one percent to three percent, and if we look at the inflation trend as calculated three months back, we will find that it is closer to the bottom of the government target (only 1.1%). But most economic forecasters expect inflation above the government target and unfortunately, very close to the target ceiling (2.8%).

The macro data is good. even very good ones. Unemployment is back and falling. The shekel returned to the level it traded at a year ago, before anyone even thought about Gaza. And even the downgrade of the credit rating by Moody's failed to "downgrade" the Israeli economy. But the growth in 2023, because of the last quarter, the victory quarter, amounted to only 2%. less than natural growth.

And the state budget was indeed adjusted to the changed reality. And despite the deficit, the state's debt repayment discipline has not been breached and Israel's debt-to-product ratio is one of the best in the world. But no one knows what will happen if the fighting on the northern front intensifies and turns into a real war. In view of all of the above, the Bank of Israel chose to remain with both feet on the fence in the "sit and don't do it – better" exam. In short, the bank sits and waits for developments and in the meantime works to reduce the bad impact of the war both from a monetary point of view and in terms of price stability.

And still I want to draw attention to two additional considerations for allowing the interest rate to remain unchanged and I am quite convinced that when the bank publishes the minutes of the interest rate discussions, at least one of the two considerations will be found in them. The other considerations are the difference in interest rates between small Israel, large America and the middle and warehouse Europe of the Bank of Israel.

The interest rate gap: As of today there is a small interest rate gap that does not scare away investors. But on the day the Bank of Israel chooses to lower the interest rate when in the United States and Europe they prefer to wait with the interest rate reductions, the gap will increase and this may cause many investors to prefer the interest yield offered to them in dollars or euros rather than in shekels. And when liquid and fast money goes out, long-term investments also experience a decline.

And what is the story of the cartridge? Neither one nor two of the heroes who fell in Simchat Torah fell because they had no bullets left in the magazine. The Bank of Israel does not want to fall, God forbid, in the event of a frontal war with the Shia terrorist organization Hezbollah to the north. He keeps a few interest rate lowering pills in his stash in case the economy enters a recession and it is necessary to give him a shot of encouragement in the form of cheaper money that will stimulate economic activity.

And one more small thing to finish, which the governor also referred to. Israel is a country familiar with operations, wars and just plain trouble. Year after year it becomes clear that at least in everything related to the economy, Israel is surely winning. With each such round, more and more strengths and strengths are revealed in the Israeli economy, which seems to have developed a very high level of armor and survivability. It seems to me that this can also be a consideration in decisions.

Daniel Shabaks is the CEO of Hirshovitz Finance. The above should not be seen as investment advice, a recommendation or an opinion regarding the feasibility of investing in financial products of any kind and type.