Mr. President, Mme. Herzog, Mr. Prime Minister, Minister of Finance, Bank of Israel colleagues, and honored guests:
This event is taking place at a time when the best of our sons and daughters are fighting on the front to defend the State of Israel. I wish them tremendous success. I would like to take this opportunity to offer my condolences to the families of the fallen and murdered in the war, to wish a speedy and complete recovery to the wounded, and to pray for the rapid return of all of those kidnapped.
I would like to thank you, Mr. President, the Prime Minister, and the Minister of Finance, for the decision to appoint me to a second term as Governor of the Bank of Israel. I would like to use this stage to also thank the employees of the Bank of Israel for their professional and dedicated work. I would also like to thank the members of the Bank of Israel management, members of the Monetary Committee, and members of the Bank’s Supervisory Council. And I would personally like to thank my wife Nurit, my children Bar and Tomer, and my close family, who allow me to dedicate my time and efforts to fulfilling my role, and who have supported me throughout my career.
In my remarks, I would like to briefly review the years that have passed, the war and its consequences, and to look beyond the current time to the challenges that will face us in the coming years.
The five years in which I have served as Governor of the Bank of Israel were among the most complex times the Israeli economy has known. The COVID pandemic, the war between Russia and Ukraine, the outbreak of inflation, five election campaigns, the public dispute surrounding legislative changes, and more. But the most significant challenge, in both national and economic terms, began with the murderous attack on October 7, which marked the start of the Swords of Iron war.
The Israeli economy was at a strong starting point prior to October 7. The debt to GDP ratio, one of the most important indices of an economy’s strength, had declined back to around 60 percent. The deficit forecast in the budget was low, the unemployment rate was low, and the growth forecast was encouraging, certainly by international comparison. In addition, Israel’s foreign exchange reserves of more than $200 billion, provided a large security buffer that made it possible to deal with the rapid depreciation of the shekel at the beginning of the war, and to stabilize other financial markets as well.
It is important to emphasize that the Israeli economy has in the past shown an excellent ability to recover from crises that have happened over the years. This was true of the COVID-19 crisis, and has also been apparent over the longer term with regard to geopolitical and security events. Our public that is desirous of life, Israeli initiative and resilience, and the fact that we are world leaders in technology, have all made a huge contribution to this ability. They all show that the Israeli economy has the necessary foundations to come back and prosper after the Swords of Iron war as well. I emphasize this in every domestic and international forum.
However, we do not live in a world of unlimited resources. So in order to maximize the economy’s potential, in view of the war’s economic and security consequences, we must adapt economic policy. Investors, the ratings agencies, the financial markets, and the entire public are currently keeping a close eye on policy in Israel. Now more than ever before, we must manage economic policy—both fiscal and monetary—with a high degree of responsibility. The government must find the correct balance between financing the expenses of the war and the expected growth of the defense budget, and the need to continue investing in other civilian expenditures, which are lower to start with, particularly in growth engines such as infrastructure and education. I would like to emphasize again that it is important to maintain this responsibility, and to avoid expenses that are not connected with the war effort or that do not advance growth.
One possible way to implement this is that in the budget for 2024, all military and civilian expenditures that are directly connection with the war should be included in a temporary special budget that would come in addition to the original expenditure ceiling for 2024. In parallel, and in order to include the expected permanent increase in defense expenditures already now, adjustments of a similar scope—for instance about NIS 20 billion—should be made to other budget items, preferably those of a persistent nature. Such adjustments can be made through reducing government expenditures and through increasing revenue, such that the deficit ceiling will be set at a level that will lead to a decline in the debt to GDP ratio after the war. It is preferable that these adjustments be made as quickly as possible in order to make it clear to the markets that Israel knows how to deal with the increased defense burden while maintaining fiscal responsibility.
I would also like to discuss the economic situation looking forward. It is extremely important to continue advancing the strong and prosperous private sector that exists in Israel. We must continue promoting technological innovation, which is the economy’s growth engine. In this regard, there are no shortcuts, and the foundations for it were, and will continue to be, planted deep in investment in high-quality relevant education for our children. Technological changes, including the AI revolution, are leading to more frequent changes in the economy, and will apparently force citizens and workers to more rapidly adapt—which requires relevant skills. In such a world, core curriculum studies become even more important for all Israeli students. Education is the key to growth, to opening opportunities, and to reducing inequality. We want these opportunities to be available for all Israeli children. In addition, Israel must continue developing its physical and digital infrastructure. These have an impact on productivity, on the housing market, on the quality of service in the public sector, and more. These are the keys to an Israeli tomorrow in which the economy marches forward.
Price stability is a necessary condition for proper economic activity. There is no dispute about that. The monetary policy of a small and open economy such as Israel must find the proper balance to navigate between the business cycles and global activity and the unique needs of the Israeli economy. Every economy has specific structural conditions that enable, and sometimes even require, different policies. The Bank of Israel will continue to manage such policy responsibly, using the policy tools at our disposal, to maintain stability of prices and of the financial markets, and to support prosperity and economic growth.
In the period prior to the COVID pandemic, many central banks had to deal with an inflation environment that was below the targets. In contrast, deglobalization, creating redundancy in the global supply chains, and the expected growth in investments in the clean energy economy, may lead to inflationary pressures even after the end of the current inflation cycle. This perspective strengthens the Bank of Israel’s analyses in recent years with regard to leaving the inflation target as it is—1–3 percent—to enable the necessary flexibility in our economy. We will obviously continue to monitor global developments in this regard.
I would like to discuss developments in the financial system. It is important to understand: The system is the bridge between the wheels of the economy, connecting risk with investment. The more efficient it is, the better off the entire economy will be. We have contributed to a significant change in the world of payments and financial innovation in Israel. Five years ago, we could not make payments using cellphones, switching between banks was complex and could not be done online, credit rating and statement data were not available, and there had not been a new bank created in Israel in over 40 years. All of these grew and developed, and they now help primarily households and small businesses, which are significant factors at the focus of our thinking and actions.
We will continue leading such developments through additional measures to enhance competition and innovation in the financial system. I intend to lead a strategic plan for the Bank of Israel in the coming years. Among other things, we will work in the world of payments and banking of tomorrow—continuing to examine the potential issuance of a digital shekel, streamlining and simplifying cross-border payments, and developing the future world of finance.
I would like to take this opportunity to emphasize again how important the stability of the financial system is. This stability is not a foregone conclusion, and it is unfortunate that there are those who think lightly of it. Economic history shows that shocks that are accompanied by a financial crisis are deeper and more economically painful. This is also the reason that we took essential and rapid steps at the start of the COVID pandemic and at the beginning of the current war. The business model in the financial world is changing, but the risk of a run on the banks or on a leveraged financial entity is even more challenging in the modern digital world. It is no accident that the Nobel Prize in Economics was awarded last year on this topic.
Looking forward, and as part of the lessons of the US banking crisis last year, it is necessary to reexamine resolution processes in the financial system, how new banking and financial entities are assimilated, and more. We will continue advancing the measures and the various tools that the Bank is creating to benefit the prosperity and development of the financial system in the coming years, while maintaining stability and increasing competition.
Before I conclude, I would like to emphasize the importance of the strength and independence of various institutions, including the Bank of Israel. We have recently heard repeated statements and attempts to intervene in market mechanisms with regard to banking and finance, and even in matters of monetary policy, through legislative proposals. It is important to understand that a blow to these areas is a blow to the Israeli economy. There are a great many examples of the damage caused in economies in which there was such a blow. The markets and the international institutions attribute supreme importance to the independence and professionalism of the central bank and of the monetary committee. The Prime Minister understands well the importance of this matter, and unfortunately, he had to intervene multiple times in this regard, and I thank him for that.
To conclude, I hope that the days following the war will mark a new start—one that learns from the past, from both its successes and its failures. I wish prosperity for all of Israeli society, in which everyone contributes and everyone is a partner and enjoys its fruits.
Continuing as Governor is a special privilege and mission for me, particularly at such a critical time. I will do my best to continue working for the good of the Israeli economy and the good of the State of Israel.
Thank you.