Yaron, who also did not rule out more rate hikes should inflation pressures re-emerge, said he would make known his decision on another five-year term after a three-week Jewish high holiday period ends on Oct. 7.

"Whoever is the governor has to continue to be independent and to express the professional opinion in matters concerning the Israeli economy," he said in an interview with Reuters. "And that such a position provides confidence to the markets."

On Monday, the central bank denied a report by one of Israel's two main radio channels that Yaron would say on Monday that he will not seek to stay on when his current term expires at the end of the year.

While not tipping his hand, Yaron said the last five years have been "one of the most challenging" for any Israeli central banker ever, citing five election cycles, the Covid pandemic, the Ukraine-Russia war, inflation and the government's plan to overhaul the judiciary that has sparked mass protests.

Yaron has been critical of Prime Minister Netanyahu's government's judicial plan. He has also had to fend off criticism and potential legislation from lawmakers over steep rate increases that have boosted bank profits and harmed mortgage holders, while banks were slow to pass on higher rates to savings accounts.

Before his term ends, there are still two more inflation readings that will influence monetary policy.

"If we will deem that developments have been less favourable in terms of bringing inflation down, be it (economic) activity much stronger or inflation much more sticky than we expected, we will not hesitate to raise interest rates," Yaron said. "It's a real possibility."

"We're absolutely determined to bring inflation back to the target and make it sustainably there."

RESTRICTIVE

On Monday, policymakers held the central bank's benchmark interest rate (ILINR=ECI) at 4.75% for a second straight time. It had raised the rate 10 times in a row from 0.1% in April 2022 before pausing in July. The next decision is on Oct. 23.

"We think we are at the right place," Yaron said, noting that a 4.75% policy rate should be restrictive enough to bring inflation back within its 1-3% target range.

"We don't think we've seen the totality effects of the previous interest rate hikes and their effects on the economy ... Barring surprises, the current rates should bring us back to target."

However, although the annual inflation rate dropped in July to 3.3% from 4.2% in June, Yaron said the rate will likely be around 4% for August.

Factors that could boost inflation include higher oil prices and a weaker shekel which is down some 8% versus the dollar in 2023 and has contributed 1.5 percentage points to the inflation rate.

Still, the central bank has opted not to intervene in the market as it did when the shekel was strengthening in years past. Yaron said the shekel has deviated from its traditional correlation with financial markets abroad and investors are trying to determine the proper risk premium due to the judicial plan that has led to lower foreign investment.

"Throughout the process of depreciation, we've seen the shekel be a lot more volatile but markets have functioned well here and we have not seen any market failures," he said

"We believe we should let the market determine, given all these uncertainties, the risk premia associated currently with the shekel."