“The interest rate cut is another in a series of clear measures and signals – Israel is on the path to tremendous economic growth,” Finance Minister Bezalel Smotrich responded to the Bank of Israel Monetary Committee’s decision yesterday to cut the bank’s interest rate by 0.25% to 4.25%.
Market analysts do not believe that yesterday’s interest rate cut is enough to boost the economy, and are pinning their hopes on the continuation of this trend, but for the Minister of Finance, this step has political importance as the elections approach. It now remains to be seen whether the political pressure on the Bank of Israel will continue. Smotrich added criticism of the Governor of the Bank of Israel, saying that the interest rate cut should have come six months ago, and should have been deeper.
Bank of Israel Governor Amir Yaron said in an interview with “Globes” after the interest rate announcement: “We are after several years in which the ratio of government debt to GDP has increased, and despite that, we have maintained the confidence of the markets.” “This happened thanks to the budget adjustments, and we were able to convey the message that after the fighting subsides, the debt-to-GDP ratio will start to decline,” Yaron said. “So, the first principle is that the 2026 budget framework should lead to a significant reduction in the debt-to-GDP ratio,” which in effect puts the responsibility for creating room for further interest rate cuts on Smotrich himself.
What should the fiscal deficit be if we want to achieve a reduction in the ratio?
“I would say a little over 3% of GDP. The second principle is to provide as many growth engines as possible, and pull money from places that do not support growth, such as negative incentives to work or acquire education with skills appropriate for the labor market.”
Another principle Yaron pointed out is to maintain balance when it comes to the defense budget. “We know that the economy needs security, but security also needs the economy,” he said. “On the one hand, the defense budget must be built in accordance with the modern threat map, but on the other hand it must take into account all the needs of the economy.”
The army calls for the mobilization of 60,000 reserve soldiers. How do you see that demand?
He added: “The Prime Minister and other decision-makers will have to discuss the matter in light of the current threat map and try to find some way to reduce the defense budget.”
Yaron went on to temper the expectations of anyone hoping for further interest rate cuts when the Monetary Committee meets again in January. He added: “We still need to be more cautious, so interest rate cuts will be calculated and gradual.” “We will have to act cautiously and in a measured way. Both in Israel and around the world, it does not look like interest rate levels will fall in the coming years to the zero levels we saw before the Covid pandemic.
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“The Bank of Israel’s research department’s latest forecast, as of September, expects the interest rate to reach 3.75% by next September. We will of course implement a revised forecast, but for now it certainly looks like a reasonable interest rate environment.”
Bank tax
One of the biggest points of contention between the Bank of Israel and the government at present is the initiative to impose a new tax on banks. The Prime Minister’s economic advisor, Professor Avi Simhon, is trying to introduce a measure under which the new tax would subsidize mortgages, which have become much more expensive due to the sharp rise in interest rates since 2022.
Last week, a joint team between the Ministry of Finance and the Bank of Israel on the issue of imposing a special tax on banks, which have made amazing profits thanks to high interest rates, published its conclusions for public comment. The panel presents the advantages and disadvantages of imposing a special tax on banks, but refrains from making an explicit recommendation one way or the other.
In his interview, Yaron did not express opposition to the team’s report, but his many reservations about the idea of the tax are enough to give an impression of his position. He added: “Sectoral taxes are something we consider a problem, and we have said that for a long time.” “Therefore, if super profits are taxed, distortions must be avoided.”
Yaron added that imposing taxes of this type could lead to image problems at the international level. “It will be a negative incentive for financial institutions to enter this sector. We must be very careful, in a situation like this there must be a committee of experts that studies the matter in depth, similar to the Szczynskiy Committee (which examined taxes on gas exploration companies) that can look at the sector in relation to all sectors.
“As I understand it, the current bill talks about a temporary provision. At least it’s not going in the direction of something permanent. We also, even though we had representatives on the team, still wanted to examine the specific proposals further, even for a temporary measure.”
Published by Globes, Israel Business News – en.globes.co.il – on November 25, 2025.
© Copyright Globes Publisher Itonut (1983) Ltd., 2025.
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