Israel’s central bank has revised down its economic growth forecast, citing risks associated with the escalating conflict in Gaza. According to the revised projections, the country’s gross domestic product (GDP) will expand by 2.3% this year and by 2.8% in 2024, down from the previous estimate of 3% for both years. The downturn in growth is a result of the impact the war has had on the Israeli economy.
The central bank anticipates that the conflict will have the most significant impact on the economy in the fourth quarter of this year. In an effort to support the shekel, which has plummeted to an 11-year low, the regulator has left interest rates unchanged. However, it warned that if the war were to escalate further, it may need to adjust its policies accordingly. The benchmark interest rate stands at 4.75%, the highest level since late 2006.
In a statement, the central bank said, “The interest rate path, and the use of additional monetary policy tools, will be determined based on developments in the war, as well as economic activity and inflation dynamics. This is to ensure market stability and achieve the objectives and needs of the economy.”
The depreciation of the Israeli shekel has been a daily occurrence since the conflict between Israel’s security forces and Palestinian armed groups in Gaza escalated on October 7. The drop in the shekel’s value poses a significant inflationary risk. Additionally, the regulator has warned of a large disruption to the economy, which will result in reduced consumer demand for goods and services. Both supply and demand are expected to be constrained due to labor shortages caused by mobilization and infrastructure destruction.
Taking into account the costs of war, Israel has also revised its projections for its budget deficit. The government expects the deficit to reach 3.5% of GDP this year as it plans a substantial wartime stimulus program.
The economic repercussions of the Gaza conflict are concerning for Israel’s economy, with potential long-term effects on growth and stability. However, the central bank remains committed to supporting the markets and implementing necessary measures to mitigate the impact of the war.
In conclusion, the escalating conflict in Gaza has led to a downward revision of Israel’s economic growth forecast. The central bank expects a slowdown in GDP expansion and a rise in the budget deficit. The shekel’s depreciation, labor shortages, and infrastructure destruction are all contributing factors to the economic challenges faced by the country. The central bank will closely monitor the situation and adjust its policies accordingly to support market stability and achieve the objectives of the economy.
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