The Israeli government’s budget deficit is widening sharply and we think it will breach 5% of GDP next year. Provided the length of the war and the increase in the deficit are short-lived, we don’t think this will cause funding problems and the inflationary consequences probably won’t be large enough to prevent interest rate cuts from the central bank next year. That said, a key risk is that there is a larger and longer-lasting rise in the deficit, which could add to risk premia on sovereign debt and prevent inflation falling.
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