The Israeli economy is facing a significant hit to growth projections as a result of the Middle East conflict — but its central bank chief is hopeful that a rapid resolution to the wars in Lebanon and Iran can help ease the shock.
Speaking with CNBC’s Karen Tso at the IMF-World Bank spring meeting in Washington, D.C. on Thursday, Amir Yaron, governor of the Bank of Israel, acknowledged there is still “huge uncertainty” around the duration of the conflict, despite recent signals that a resolution could be in sight.
Israel and Lebanon agreed an immediate 10-day ceasefire Thursday following talks in Washington between officials from both countries.
Israel has slashed its growth expectations for 2026 from 5.2% to 3.8% as a result of the hostilities in the Middle East.
But Yaron — who was speaking shortly before U.S. President Donald Trump announced the temporary truce on Thursday — believes growth can rebound to 5.5% in 2027, should those conflicts be resolved.
“It’s a working assumption,” Yaron said.
‘Boots on the ground’
A de-escalation in hostilities would ease geopolitical risk in Israel, along with the Gulf states, and help to boost growth. But Yaron also acknowledged the possibility of a much more prolonged conflict, which he said would weigh on growth and inflation expectations.
“Markets, both aboard and in particular in Israel, are taking the view that the geopolitical situation has improved a lot already,” he explained, pointing to the strength in Israel’s stock market, the shekel’s rally, and five-year credit default swaps returning to pre-campaign levels.
By contrast, any escalation of the conflict “would obviously detract more growth from the current forecast.” Yaron added.
Oil prices fell on Friday morning following the Israel-Lebanon ceasefire agreement, as Trump repeated his assertion that an end to the war in Iran is in sight.
Inflation is expected to be around the low 2% area in 2026 and into 2027, but Yaron said central bank forecasts remain particularly challenging amid ongoing uncertainty.
‘Resiliency’
However, he said Israel’s economy, which has remained essentially on a war footing since the Oct. 7 2023 attacks, has shown “resiliency”, “dynamism” and “agility”, in “normalizing what otherwise would be an un-normal situation.”
He highlighted the country’s defense and technology sector, where the main defense stocks are already seeing “huge” back orders for their products, highlighting the Iron Dome and other high-tech products.
“It’s pretty clear defense expenditures around the globe are going to increase over time,” he said. “That sector if anything is doing very well in Israel right now.”
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 ease, and military reservists return to the economy to help ease the labor supply.
“That would be enough to keep inflation in the low 2s towards the end of 2026 and 2027, that would allow us to do those one or two cuts,” he added. “Of course, there is huge uncertainty. This is not a promise.”