Bank of Israel steps up fight against inflation with 0.4 point interest rate hike
The Bank of Israel raised its benchmark interest rate by a greater-than-expected 0.4 percentage points on Monday, continuing its aggressive battle against rapidly rising inflation amid strong economic growth.
The suddenly hawkish central bank lifted its key rate to 0.75% from 0.35%. In April, policymakers had raised the rate from 0.1% – an all-time low where it had stayed for the prior 15 decisions since a 0.15 point reduction at the outset of the COVID-19 pandemic.
“The Israeli economy is recording strong growth, accompanied by a tight labor market and a continued increase in the inflation environment,” the bank said in a statement. “The [monetary] committee has therefore decided to continue the gradual process of increasing the interest rate.”
It added that the pace of rate hikes will be based “in accordance with activity data and the development of inflation.”
All 14 economists polled by Reuters had said they expected the monetary policy committee to raise rates, 11 of them predicting a 0.25-point increase while three others projected a 0.4 point rise.
“Even after the hike, rates in Israel are still at the Federal Fund rate’s lower bound,” said Yonie Fanning, economist at Mizrahi Tefahot Bank.
Israel’s annual inflation rate reached a fresh 11-year high of 4% in April, well above the government’s 1%-3% annual target range, while inflation expectations for the coming year remain around 3.5%. At the same time, Israel’s economy shrank in the first quarter after a robust 2021, but the jobless rate has fallen to 3.1%.
The central bank dismissed an annualized contraction of 1.6% in economic activity in the first three months of 2022, citing 15.6% growth in the fourth quarter.
“Economic activity in Israel is continuing at a high level,” the central bank said. “Indicators of economic activity continue to show levels close to potential, and the pandemic’s effect on the economy has declined significantly.”
It added that the war in Ukraine and the lockdowns in China are increasing inflationary pressure, and leading to a slowdown in the pace of global economic activity.
Analysts expect the key rate to rise 1.5 to 2
points in the next year.
Israel Manufacturers’ Association president Ron Tomer criticized the rate hike, saying inflation is expected to stay contained in the next year.
“Excessive rate increases could suffocate the economy and reduce investment,” he said, adding that rate increases have a limited impact on rising fuel prices and supply chain disruptions.
The shekel gained 0.5% versus the dollar on Monday to a rate of 3.34 after weakening nearly 5% against the US currency and 1.4% versus the euro since the last Bank of Israel policy decision on April 11. (Reuters)