How much would the war against Hamas cost Israel? Full tally pegs at $53 billion

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Israel’s central bank has released its detailed assessment yet of the economic implications of the war with Hamas, as it cuts interest rates to calm markets.

The Israeli army operates in the Gaza Strip (via REUTERS).

The revised view of the bank’s research unit puts the conflict’s “significant impact” on Israel at 198 billion shekels ($53 billion), with defense spending accounting for more than half of the total. The fiscal cost of the war was previously In 2023-2024, the leader capital market was estimated at 180 billion shekels, and the Ministry of Finance said that the economy is losing about 270 million dollars every day.

The Bank of Israel’s domestic research group also cut its economic growth forecast and now expects gross domestic product to expand 2% this year and next – 2.3% in 2023 and 2.8% in 2024. The same GDP forecast for this year but sees slightly weaker gains going forward. .

On Monday, in addition to the new forecasts, the monetary committee left the key at 4.75% according to all forecasts. The shekel traded stronger against the dollar after the announcement.

Speaking after the decision, Governor Amir Yaron warned that the war’s “budget crisis” would persist in the medium term and urged the government to be careful when issuing a new budget.

“Besides the need to respond fiscally to the needs created by the war, it is also important to maintain a responsible fiscal framework in times of emergency,” he said. “It is important for the government to stop spending new things for a long time.”

Debates are raging over Israel’s current budget reform, with central bank officials recently criticizing the ruling government’s reluctance to press for funding for religious programs and the war on West Bank settlements.

Israel’s worst armed conflict in half a century has crippled the economy, crippling many businesses, dampening consumer demand and weakening the labor market after an October 7 attack by Hamas in Gaza that killed 1,200 people.

The cabinet is scheduled later Monday to discuss a revised fiscal plan to boost spending by 30 billion shekels in 2023.

Tensions between Prime Minister Benjamin Netanyahu and his political rival, former Defense Minister Benny Gantz, over the recently formed wartime government of national unity have escalated. Gantz said his party would have to “consider the future course of action” if discretionary funding were to remain in the new budget.

According to Mizrahi Tefahot Bank Chief Market Economist Ronen Manahem, the dispute could be an obstacle to rebalancing early next year. He said it shows a reluctance on the part of the government to shift political priorities in favor of greater fiscal discipline and focus on growth-enhancing policies.

In a statement following the central bank’s decision on Monday, policymakers repeated word for word their guidance last month, saying it was stabilizing markets and reducing volatility by favoring price stability and economic activity.

“Monetary policy can focus more on supporting economic activity in the near term as stability in financial markets takes root and the inflation environment continues to move towards the target range,” the central bank said.

Since the Bank of Israel’s monetary committee last met a month ago, sentiment has shifted sharply as the shekel continues its longest loss in four decades. While the course of the war is difficult to predict, the brief truce between Israel and Hamas ends a day after the summit.

Netanyahu’s office said Monday afternoon that negotiations were continuing on a list of those to be released. Speaking to US President Joe Biden on Sunday, Netanyahu said each additional day of reconciliation was a condition for Hamas to release 10 more hostages. Hamas has said it wants to hold off longer, but has not said whether it will release more hostages.

Israel has made it clear that it wants to continue the war until Hamas, which is designated as a terrorist organization by the United States and the European Union, is destroyed. Israel’s airstrikes and ground attacks on Gaza have killed nearly 15,000 people, according to the Hamas-run Health Ministry.

As the economic damage widens, downside risks have returned as the shekel has appreciated nearly 9% against the dollar since the Bank of Israel’s last meeting on October 23.

The decision is the first this week since Yaron was appointed governor for another five-year term. So far, Yaron has cut rates just once – in 2020 at the height of the Covid-19 pandemic – and has since presided over a record tightening cycle that has resulted in the highest borrowing costs in 17 years.

After the war began, Yaron deployed emergency measures to stabilize the markets. The central bank’s recent recovery of the shekel reached an unprecedented $8.2 billion in October.

Concerns around inflation may be a hindrance to reducing inflation in the future. From the end of 2021, price growth is 1% to 3% above the government’s target.

The central bank said on Monday, “Given the recent volatility in inflation, there is a risk that the shekel’s depreciation will be in line with projected inflation.”

The outlook is still in flux, although Israel has so far defied some early inflation forecasts, with annual inflation easing slightly to 3.7 percent in October.

“This could be an inflection point for inflation because eventually transportation problems, shortages of raw materials and pressure on the housing market could push prices higher,” said Ori Greenfeld, chief strategist at Psagot Investment House. The central bank may choose to wait until it is confident that inflation will fall below its target of 1-3 percent before cutting the rate.

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