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Indiana University is shaping the future of healthcare. Advancing discoveries that become treatments for Alzheimer's, obesity, cancer and rare diseases. And training the providers trusted to deliver them from the lab to the clinic. IU powers medical breakthroughs and the talent behind them. See how IU solves. What's next iu Edu Impact.
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Bloomberg Audio Studios Podcasts, Radio news We've got IMF meetings.
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Yes, they are underway. The imf, the imf, the World bank, everybody seemingly meeting in Washington this week and we've been covering all of it. Our colleague Bloomberg Surveillance co host Lisa Abramowicz is there. She's done a string of incredible interviews and she has another one for us here. Lisa will have to hand it over to you.
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Thank you so much. I really appreciate it. I am here with the bank of Israel Governor Amir Yaron. He does run the central bank. You also advise on financial policy at a time when the mood has cleared and there is a real sense right now in Israel that something significant has shifted. How much can you count on the war truly being over when crafting policy right now?
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Well, Lisa, first, thank you for having me. Again, it's important to understand a Israel entered very well 7 October 7 October did negatively impact Israel in a significant way. But the Israeli economy throughout these two years have shown remarkable resiliency. Now we are seeing that, that if this agreement, we hope it proves sustainable, that will bring sort of a lasting calmness and stability. And those are conditions that are definitely can unlock a lot of growth, rapid recovery both for Israel and maybe for the region at large.
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There's a lot of debt that has been incurred for during this whole endeavor. There's also inflation that's actually come in less than expected, which has opened the door maybe to the possibility that maybe you could cut rates even before the November meeting. Is that a possibility?
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C
The first thing to say about inflation, our monetary policy has actually proved itself in the sense that in spite of the war, wars are usually inflationary. Inflation has converged into our target which between 1 and 3% all throughout maintaining financial stability, which of course is very important. This was an encouraging CPI that came in. Right now we are at two and a half. But there are two fundamental forces that are working now with the cessation of the fighting. On the one hand, short, there's short of labor supply that has been there all the time. We're going to see probably some release of reserve people and that's going to help reduce inflation. We've seen the Shekel appreciate part of throughout time and in particular in the last, due to the cessation of the cease fire, then those are basically putting downward pressure on inflation. On the other hand, the optimism is potentially bringing a boost to demand. And so with these two offsetting forces, we want to see clarity a little bit on the forces that indeed inflation is converging more firmly. And we have some encouragement by the cpi. But we want to see this continues to go. And we are, because of the uncertainty, even about the agreements and everything, when we move, we still have to move very cautiously.
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There's always uncertainty. Right now, globally, there's a lot of uncertainty. It seems like the uncertainty is much more heightened at a moment when you have been at war for more than two years. And now there's this question of what the permanent situation will be of the Defense Department also what kind of permanent expenditures are going to have to be on, on the government. I'm just wondering if you a sense of that or if that's also one of the variables that's up in the air.
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C
I think it is one of the variables that's up in the air. Part of it is we want to see that the ceasefire and maybe phase two and maybe even other normalization factors, those will all affect the long run expenditures of military potentially at least now from the fact that there is a ceasefire and the planning was to go in advance longer into Gaza, that saves for the short run some fiscal cost. But I think this is one of the big assessment in terms of our fiscal situation is what are the expenses going forward? What is the growth that we can see in the coming years given the geopolitical situation? As I said, I think if we see stability, growth will come back. Israel tended to grow 4%. We're probably going to grow even more than that, at least in the short run. Recent economic activity in Israel showed VC money growing. We've seen credit card usage quite high. We've seen sentiment and trend surveys are being positive. And that's also related to your previous question regarding inflation. Why we still have to be cautious in how we deal with our monetary policy.
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B
Picking up on the VC flows and some of the other inbound flows from overseas. There has been some reputational damage that Israel has suffered. There have been a number of countries that have said that they're going to withdraw investments or limit investments into Israel. Have you seen those flows start to come back? Do you expect them to? Is that something that you're kind of trying to observe right now?
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C
So first, as I said, the last two quarters we've seen VC money Coming in in a very strong way. Prior to the ceasefire, we saw some discussions on sanctions and Israel is obviously a small open economy. We have to do everything in our power to maintain our openness and we do that. And I think with the ceasefire and, and the more it lasts, we will see some of this reputational risk hopefully get mitigated over time. And that's partly why I think this could unlock growth and bring us back to our potential and maybe even beyond.
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How big is the range right now in your growth outlook? I mean, I know it's pretty wide everywhere, but for you it's got to be extra. Extremely significant.
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C
No, I think if you look at our last analysis, and that was before the cease fire agreement, we basically assumed the war would kind of end at the beginning of 2026. And we assumed that growth of two and a half percent in basically 25 and about 4.7 in 2026. And in some sense what has happened now, things have shifted one quarter ahead. That probably improves slightly 2025. The big issue is 2026. If this is a lasting agreement and it moreover, if it develops into more normalization, which clearly some of President Trump and us would like, would like to get there, that could unlock even more growth, growth in 2026 and beyond.
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B
We're here in Washington D.C. the last time we were here the discussion was all around central bank independence. Now it's about a question of de dollarization. What is the new monetary order? What's been your big takeaway from these particular meetings being here?
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C
I think a, there's a lot of discussion on the digitization and stable coins and what that might do to banking and fragility. That's one big issue. Private credit is that a risk factors are asset market valuations in line and of course the geopolitical uncertainty it's globally and what that might do and what that might trigger. I don't think there are definitive answers, but those are the things that minds are trying to figure out.
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B
From your perspective, given how significant the tech sector is in Israel, how much are you focused on the elevated valuations and the potential threat to financial stability, particularly because of how dominant that field is in Israel.
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C
So obviously Israel's locomotive engine is the high tech sector. And as I said, it's been very resilient, partly because it's very well diversified right now. Everybody knows we are extremely frontier in cyber, but we also very good in medtech, fintech, defense tech. Now with all the investments in defense in Europe and otherwise, we have a lot of things to offer AgroTech. So all these areas gives us a very well diversified portfolio of high tech. And obviously in the AI there's, there's, there's a lot of strong valuation. We tend to be particularly in more on the applied side. So I think time will tell what, what those, how much benefits those new innovations bring in. But I think the Israeli sector in general is relatively diversified enough that it can withstand even shocks to markets in terms of the areas it is particularly placed in.
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Governor Yaron, thank you so much for taking the time. Always a pleasure. That was Governor Amir Yaron of the bank of Israel.
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