Bank of Israel Governor Prof. Amir Yaron last night told the Aaron Institute for Economic Policy at Reichman University (formerly IDC Herzliya) conference that the central bank will be raising its forecast for annual inflation. He said, “We have not yet published our latest forecast but it wouldn’t surprise us if (annual) inflation in the coming months will be above 4%.”
He added, “But what is important is that in the first quarter of 2023, we already see a dramatic fall in inflation and by the second quarter we already see it entering the inflation target range.”
Inflation in Israel today is already 4% annually, which is 1% above the top range of the annual target of the Bank of Israel. “It is better to look at the global perspective. Compared to overseas, we are in the lowest decile for inflation, significantly lower than what is happening around the world. For example, in the US inflation is 8.3% and the median inflation in the OECD is 7.5%. Nevertheless, our inflation is above target. We are very attentive to this and determined to bring it back to the target range.
“Why is our inflation so low? First of all, we are unfortunately starting from a base of high prices. The cost of living in Israel is high in the field of food, for housing, transport, and more. In addition the shekel exchange rate is strong and this also contributes to the fact that our inflation is lower.
“Wage agreements have also helped moderate the pace of rises and the exit from the crisis. I want to say that from the Israeli experience, in discussions about wage agreements in all sorts of fields, it is very important not to introduce a mechanism for linking salaries. We know what happens with inflexible mechanisms, which bring a dynamic that could very much damage, in the area of inflation. It’s fine to have negotiations but a linkage mechanism must not be established,” Yaron said referring to current negotiations between the Ministry of Finance and the Teachers Union and Histadrut.
Speaking about concerns regarding a crisis in the tech industry, Yaron said, “From the analyses we have done, we explicitly see that a slowdown is possible and even expected. But the shock that we see is not the same shock as Covid, when some of the demand in high-tech actually even rose.”
He added that, “A large part of Israeli tech companies currently have revenue, liquidity and we have an economy which is more flexible on credit, and so while there may be a slowdown here, it is not expected to be on the scale of the dot.com crisis.
“The high-tech sector made a great contribution to the fact that the contraction during Covid was small. It is naturally exposed to the global economy and volatility on markets but we saw the resilience of the sector during Covid. It is strong, mature and spread over many areas. It has revenue and is not just an economy of dreams, and so it withstood this.”
Published by Globes, Israel business news – en.globes.co.il – on June 8, 2022.
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