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Israeli Economy Faces Financial and Economic Challenges Amid Gaza Conflict

As some sectors of the Israeli economy begin to adapt to the ongoing war with Gaza, concerning figures are emerging for financial and monetary policymakers.

The confusion was highlighted by the Bank of Israel’s decision to maintain interest rates unchanged during a meeting held last week, which was followed by sharp criticism from Finance Minister Bezalel Smotrich, who sought a reduction.

On Wednesday, the Bank of Israel kept interest rates steady at 4.5%, while consumer price indexes started to show increases in local markets beyond the target range.

Finance Minister Smotrich considered the decision to maintain interest rates as a disregard for stimulating the local economy, arguing that lower interest rates would encourage borrowing, investment, and capital inflow.

He stated, “Based on the data in the interest rate decision, the bank’s governor should have reached a completely opposite conclusion. Inflation is supply-side inflation, not demand-side inflation. Flights are more expensive because companies are not flying due to the war, and fruits and vegetables are more expensive because we don’t have Thai workers.”

Smotrich is facing severe criticism from industry leaders in Israel due to the slowdown in local economic indicators and the government’s inability to compensate for the lack of Palestinian labor.

Economic Slowdown Due to Gaza Conflict

Many Israeli sectors have seen significant declines due to the ongoing conflict with Gaza. After inflation peaked at 5.4% at the beginning of 2023, the rate began to decline with the Bank of Israel’s interest rate hikes, reaching 2.5% in February. However, the impact of the Red Sea crisis, lack of Palestinian and Thai labor (in agriculture), and other factors are now showing their effects on consumer prices in Israel.

In July, consumer prices jumped to 3.2%, up from 2.9% in June, marking the highest level since November 2023. Housing prices in Israel have risen amid a decrease in supply due to the absence of Palestinian labor, while prices for vegetables and fruits have surged due to the lack of Thai workers, compounded by the Red Sea crisis.

There is concern in Israel that consumer prices may continue to rise, potentially delaying the Bank of Israel’s plans to lower interest rates until late 2024 or early 2025. Such a delay could exacerbate the Israeli economy’s growth slowdown, with high borrowing costs persisting amid the economic and financial repercussions of the Gaza conflict.

The Illusion of Unemployment Reduction

Another issue involves what Haaretz described as the illusion of reduced unemployment. The unemployment rate fell to 2.8% in July, compared to 3.1% in June. This decline was not due to new job creation but rather because some unemployed individuals were removed from the unemployment statistics by the Israeli Bureau of Statistics.

Haaretz reports that the reduction in unemployment to its lowest level ever in July is based on misleading factors. The decline is attributed to two main reasons: individuals entering military service were considered employed, and tens of thousands of displaced people from the north and south, who have not been seeking work for over ten months, were removed from the labor force statistics.

This means that the drop in unemployment is not due to a rapidly advancing economy creating high demand for workers but rather due to a labor shortage and manipulation of the unemployment concept.

Since October 7, 2023, Israel, with American support, has been waging war on Gaza, resulting in approximately 135,000 Palestinian casualties, mostly children and women, and over 10,000 missing individuals amidst massive destruction and a severe famine.

Disregarding the international community, Israel continues its assault, ignoring the UN Security Council’s call for an immediate halt and the International Court of Justice’s orders to prevent genocide and improve the catastrophic humanitarian situation in Gaza.

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