Bank of Israel warns judicial reform uncertainty poses risk to economy

The Bank of Israel published Wednesday its report for the first half of 2023, highlighting a period of financial volatility, particularly that uncertainty surrounding the Israeli government's judicial reform has increased the country’s risk premium.

According to the Israeli institution, it has also led to a devaluation of the exchange rate, a rise in inflation, and instability at both the foreign exchange and financial markets.

The Bank of Israel also warned that an intensification of interest rate adjustments coupled with the judicial reform could pose problems for the financial system in the medium term. However, the report described the Israeli financial system as stable, acknowledging the resilience of local banks, insurance companies and households.

During February and March, the risk premium surged while the value of the Israeli Shekel fell. The Tel Aviv 125 index fell by 2.1 percent and the shekel depreciated by 2.7 percent against the dollar. The Bank of Israel warned of the medium-term impact of these changes, which could include a deterioration in investor sentiment and the attractiveness of the economy.

Among future dangers, the bank cited a potential reduction in foreign investment and a decline in the credibility of decision-makers. Rising interest rates have also affected mortgage holders, with a noticeable increase in monthly repayments.

The Bank of Israel's report provoked reactions, notably from the hi-tech sector protest group, which expressed its concern by accusing Prime Minister Benjamin Netanyahu's government of "destroying the Israeli economy." Concerns were also expressed by international organizations, such as the IMF, the OECD and the major rating agencies.