The ban on Palestinian workers in Israel is causing supply chain disruptions in the country's economy, according to the central bank governor.

• More than 150,000 Palestinian workers from the occupied West Bank entered Israel daily to work in various sectors, mainly construction and agriculture, prior to Oct. 7.
• The Hamas terror attack has resulted in a supply shock in Israel and severely harmed the economy of the West Bank, according to the country's central bank chief.
• In December, Israeli business and factory owners urged lawmakers to permit between 8,000 and 10,000 Palestinian workers to resume working in Israeli settlements and businesses in the West Bank.

The immediate ban on nearly all Palestinian workers entering Israel following the Hamas-led terror attack of Oct. 7 has negatively impacted the Israeli economy, according to the country's central bank chief, who spoke at the World Economic Forum in Davos, Switzerland.

According to Bank of Israel Governor Amir Yaron, who spoke to CNBC's Dan Murphy, we are operating in an uncertain environment, and there are two types of shocks. One is a supply shock, mainly affecting the construction industry, where a third of the industry consists of Palestinians from the West Bank, and they are no longer coming to work.

Yaron stated that the issue is also impacting agriculture, with the presence of foreign workers, and this could lead to a negative supply shock, potentially causing prices to rise towards the end of the year.

He emphasized the need for the bank to monitor price developments, stating: "On the other hand, we've observed negative demand shock, particularly in times of war. This negative demand shock has been the most significant factor so far. As we continue to consider our monetary policy, we must closely monitor this development."

More than 150,000 Palestinian workers from the occupied West Bank entered Israel daily for work before Oct. 7, mainly in construction and agriculture sectors.

The Israeli occupation and its relentless bombardment of the Gaza Strip have contributed to anger and rising unrest in the West Bank, which has been severely impacted by the ban on most of its workers returning to their employment in Israel. The Israeli offensive, which began after Hamas militants from Gaza launched a surprise attack on southern Israel, has killed more than 24,000 people and taken another 240 hostage, of which 136 people remain in captivity.

Israel's Finance Ministry issued a warning in December that the prohibition of Palestinian workers could result in a significant financial loss to Israel's economy, amounting to billions of shekels each month.

According to a Finance Ministry representative who spoke to Israel's parliament, the Knesset, the estimated economic damage if Palestinians do not go to work is approximately NIS 3 billion ($830 million) per month.

In December, lawmakers were pressured by business and factory owners to permit between 8,000 and 10,000 Palestinian workers to resume their jobs in Israeli settlements and businesses in the West Bank.

The Israel Builders Association president, Raul Sargo, informed the Knesset that the industry is at a standstill, with only 30% productivity, and 50% of sites are closed, resulting in an impact on Israel's economy and housing market.

The agriculture industry in Israel heavily relies on foreign labor, specifically workers from Thailand, with at least 10,000 leaving the country after the October attack that resulted in the deaths and kidnappings of many Thai farm workers.

Yaron emphasized the importance of preventing financial instability when questioned about the tools the bank has to address a possible expansion of the war to Israel's northern border with Lebanon.

The banker stated, "We all hope it doesn't occur. If it does, then your mindset shifts to financial stability, which means the entire perspective on interest rate process and expansionary monetary policy may cease. We hope we won't have to resort to using tools like FX or other methods."

Yaron expressed optimism about his country's ability to handle shocks, given its history of dealing with wars.

Israel is a resilient economy that has shown the ability to bounce back from military events and grow quickly. He stated that homeland security and economics have a growing demand for Israel, and he hopes that if there is a better environment with moderate states, new opportunities will arise.