• The outbreak of the delta variant in Israel is a risk to the economy, but Amir Yaron of the Bank of Israel still expects recovery to continue for now.
• Authorities in Israel are monitoring whether new cases of the delta strain are translating into serious illness and hospitalizations.
• Gross domestic product is expected to grow 5.5% in 2021, down from a previous estimate of 6.3%. GDP is set to grow 6% in 2022, according to the country's macroeconomic forecasts.

The outbreak of the delta variant in Israel is a risk to the economy, but the country's central bank governor is expecting recovery to continue for now.

Amir Yaron of the Bank of Israel said the authorities are monitoring whether new cases of the delta strain, first detected in India, have translated into serious illness and hospitalizations.

"Hopefully that's not the case, in which case our baseline approach is that we will still see ourselves exiting nicely," he said referring to country coming out of the economic crisis.

"In 2021 and by the end of 2022, we will basically be very close to where we were supposed to be prior to the pandemic," he told CNBC's Hadley Gamble on Monday.

Israel's gross domestic product is expected to grow 5.5% in 2021, down from a previous estimate of 6.3%. GDP is set to grow 6% in 2022, according to the country's macroeconomic forecasts.

"Based on this forecast, the deviation of GDP from the pre-crisis trend is expected to nearly close by the end of next year," Yaron said during a press briefing on Monday after the bank held its benchmark interest rate steady at 0.1%.

"The interest rate being where it is and being accommodative, is to allow the economy to continue to exit out of the pandemic in this particular fast way," he told CNBC.

Delta risk

Israel reported 496 Covid cases on July 5, an 88.1% increase from a week ago, according to Our World in Data.

After a speedy vaccine rollout, the country initially lifted restrictions and raced toward a post-pandemic return to normalcy. But authorities have since reintroduced some coronavirus measures after the delta variant began to spread in the community.

Israel has fully vaccinated 59.8% of its population, while 65.2% have received at least one dose of a Covid vaccine, according to Our World in Data.

"Ultimately, the biggest factor is whether you put pressure on hospital and medical support in a way that cannot handle the numbers. Right now, it does not look that way," Yaron said.

Israel's health ministry on Monday said the Pfizer-BioNTech Covid vaccine's effectiveness in preventing infection and symptomatic disease has fallen to 64% since June 6. But the shot is still 93% effective in preventing hospitalizations and serious illness, it added.

Israel national budget

Yaron told CNBC that Israel needs to pass its national budget and the country has to invest for the future.

"We definitely need that state budget in place," he said. "That is the working plan for the economy for the long haul … we need to do what many other countries have to do, which is invest in infrastructure, invest in education as the economies progress, especially the high-tech (sectors)."

The country will also need to invest in human capital, he added.

Israel is aiming to approve its first national budget since March 2018 in November this year, after a new coalition government was approved by the Parliament last month.

The central bank governor said Israel has to advance its economy in the next decade in order to grow and make the right investments.

"The challenge will be to put them in, in a very responsible fiscal way, such that … debt-to-GDP is still stable over the next coming years," he said.