BoI chief warns of more rate hikes if shekel stays weak
Israel’s monetary policy is currently restrictive and at an appropriate level given moderating inflation, but interest rates could rise further should the shekel’s depreciation continue, Bank of Israel Governor Amir Yaron said on Tuesday.
Yaron said since the last interest rate decision on May 22, the shekel, which has been under pressure since the start of the year over the government’s judicial reform plans that triggered mass protests, has further depreciated 2-3%.
“Should this trend continue, an even more restrictive monetary policy may be required,” he said.
Inflation, Yaron added, was at least one percentage point higher than it should be due to a 10% depreciation versus the dollar since January.
Inflation will likely stay at around 5% in May but should to fall to the 1-3% target in the first quarter of 2024, he said.
Speaking at an Israel Democracy Institute event, Yaron said that if the government continues with its judicial plan, this should be done under broad consensus and keeping institutions independent.
The central bank has raised its benchmark interest rate to 4.75% from 0.1% in April 2022, leading to a sharp rise in mortgage repayments while banks reaped large profits and expanded dividend payouts,
stoking public anger.
Finance Minister Bezalel Smotrich told the conference it was “logical” to tax banks’ excess profits as a result of steep rises in interest rates.
Smotrich, whose speech was repeatedly interrupted by judicial plan protesters, said such a tax “is the best way to correct the distortion created by the interest rate differentials and ease the burden on the mortgage-taking public, without harmful legislative intervention.”
Yaron said banks need to pass on higher rates to customers’
deposit accounts and not only to loans. If not, he warned the central bank “will not hesitate to act with the regulatory tools at our disposal”.
Israel’s economy is “complex”, Yaron said, citing high economic activity and a tight labor market but declining consumer spending as a result of the interest rate increases.
Yaron cautioned that the judicial plan could harm the economy over the long term, quoting a report that said at least half of local start-ups founded this year would not incorporate in Israel.
He also pointed to local markets underperforming global indexes and an increase in Israel’s risk premium.
Last week, the Knesset approved the 2023-2024 state budget, which Yaron said was responsible because it was not excessively expansive, but lacked “growth generators essential to the economy, and in some places there is even a negative contribution.”
His comments came as the country’s economy is projected to slow to a growth of 2.5% this year from 6.5% in 2022. (Reuters)