Amir Yaron became Governor of he Bank of Israel in October 2018 after a long and distinguished career in academia. At the time he said normalizing monetary policy was the most pressing challenge facing the BOI.
How could he have guessed that five years later the unthinkable would happen and the most critical challenge facing BOI would become keeping the banking system open and operating, and not allowing the crisis of warfare to spill over and become a financial system crisis that could further cripple the economy.
As Governor Yaron and I sit down at the annual meetings of the International Monetary Fund we start our conversation with the October 7 attacks and how the BoI leapt into action to prevent a terrorist attack from becoming a financial crisis.
”We had to be there,” Governor Yaron said. “When the war started, we had to make sure markets function, and we took…clear actions. We put up a package of up to $30 billion of reserves. We have over $200 billion of reserves, 15 billion of dollars of swaps, that was on October 9th.
”We actually had to decide on October 7th, whether on October 8th, which is a Sunday, a working day in Israel, whether the banks are open. It's a business day, we did decide to do that. Putting these extra steps, which made sure the markets function, was very important.
”If there's one lesson we know from economics, you don't want an economic crisis, whether it's COVID or health, become an economic crisis to spill over into being a financial crisis. That's when things become much harder to deal with.
“And so we took these actions and basically the FX market, while the Shekel had depreciated, it did it so in an orderly fashion. The bond market worked, the stock market did decline, but all these markets worked and that had an important periphery effect. That was one <group> of action.
”The other one was under our head of bank supervision. You have people who had to be evacuated from the areas near Gaza with their pajamas on. They don't know what they're doing with their loans and mortgages. You had people running to military reserves. What do they do with their loans?
”We had all the CEOs of all the banks in my office, and we agreed on a unified plan where they defer loans to basically those in reserves and those near Gaza, consumer loans, mortgages, SMEs. SMEs, that was a direct credit line. All these things took place right around October 7th. That was a very stressed period, but I think the bank took very determined early actions and these were very important.”
Fast forward to October 2024. The BOI is forecasting a steady rise in inflation until the first quarter of 2025 and then a steady decline lower if the the intensity of the war peaks as forecast allowing supply chain “constraints” to ease.
Dive in and hear Governor Yaron tell the story of how the attack reverberated through the financial system, how the BoI responded and what lies ahead.
Conducting Monetary Policy Under Fire: BoI's Yaron Looks Back and Ahead