Israel’s central bank warns of economic hit from war

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The Bank of Israel said on Tuesday that the recent war with Hamas in Gaza could have a negative impact on the country’s economic growth in the fourth quarter of the year, as well as on inflation and public debt.

The central bank estimated that the 11-day conflict, which ended with a ceasefire on May 21, reduced the gross domestic product (GDP) by 0.3 percentage points in the second quarter, mainly due to lower consumption and tourism.

The bank said that the direct damage to property and infrastructure from the war was relatively limited, amounting to about 0.1 percent of GDP. However, it warned that the indirect effects of the war, such as lower consumer confidence, higher security spending and increased geopolitical uncertainty, could have a more lasting impact on the economy.

The bank projected that the GDP growth rate for 2023 would be 5.5 percent, down from 6.3 percent in its previous forecast in April. It also revised its inflation forecast for 2023 from 0.8 percent to 1.2 percent, citing higher commodity prices and exchange rate fluctuations.

The bank said that the war also increased the public debt ratio, which was already high due to the coronavirus pandemic. It estimated that the debt-to-GDP ratio would reach 74.5 percent by the end of 2023, up from 72.4 percent in 2022.

The bank urged the government to adopt a credible fiscal plan to reduce the deficit and stabilize the debt ratio in the medium term. It also called for structural reforms to boost productivity and competitiveness, especially in light of the post-pandemic recovery.

The bank said that it would maintain its accommodative monetary policy stance, keeping the interest rate at 0.1 percent and continuing its bond-buying program. It said that it would monitor the economic developments and adjust its policy accordingly.

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