The Israeli economy is facing a significant hit to growth projections as a result of the Middle East conflict – but its central bank chief hopes a quick resolution to the wars in Lebanon and Iran could help cushion the blow.
Speaking with CNBC’s Karen Tso at the IMF-World Bank spring meetings in Washington, DC, on Thursday, Bank of Israel Governor Amir Yaoron acknowledged there is still “huge uncertainty” around the duration of the conflict, despite recent signs that a resolution may be in sight.
Israel and Lebanon agreed to an immediate 10-day ceasefire on Thursday following talks in Washington between officials from the two countries.
Israel has cut its growth expectations for 2026 from 5.2% to 3.8% as a result of hostilities in the Middle East.
But Yaron – who was speaking shortly before US President Donald Trump announced a temporary ceasefire on Thursday – believes growth could reach 5.5% in 2027 if those conflicts are resolved.
“It’s a working assumption,” Yaron said.
‘boots on the ground’
A reduction in hostilities would reduce geopolitical risks in the Gulf countries as well as Israel and help promote development. But Yaron also acknowledged the possibility of a much more prolonged conflict, which he said would weigh on growth and inflation expectations.
“The markets, both in the country and especially in Israel, are taking the view that the geopolitical situation has improved a lot from before,” he explained, pointing to the strength in Israel’s stock market, the shekel’s rally and the return of five-year credit default swaps to pre-campaign levels.
Conversely, any escalation of the conflict “would clearly hamper development more than currently forecast.” Yaron added.
Inflation is expected to remain around the low 2% area in 2026 and 2027, but Yaron said the central bank’s forecasts remain particularly challenging amid the ongoing uncertainty.
‘resilience’
However, he said Israel’s economy, which has remained essentially on war footing since the 7 October 2023 attacks, has shown “resilience”, “dynamism” and “agility”, “in normalizing what would otherwise be an abnormal situation.”
He highlighted the country’s defense and technology sector, where key defense stocks are already seeing “huge” back orders for their products, highlighting Iron Dome and other high-tech products.
“It’s quite clear that defense spending around the world is going to increase over time,” he said. “If anything in Israel right now that sector is doing very well.”
Israel’s central bank kept interest rates steady at its last meeting. Yaron said it signaled the possibility of one or two cuts by the first quarter of next year, under the assumption that the war has ended, oil prices have subsided, and military reserves have returned to the economy to help ease the labor supply.
“This will be enough to keep inflation in the low 2s through the end of 2026 and 2027, which will allow us to make a cut or two,” he said. “Of course, there is huge uncertainty. This is not a promise.”
