Analysts in Israel see 0.5% rate hike in October

Bank of Israel Credit: Shutterstock Alon Adika
Bank of Israel Credit: Shutterstock Alon Adika

Bank Leumi chief economist Gil Bufman expects the Bank of Israel to raise the interest rate by a further 0.5% to 2.5% at the Monetary Committee's next meeting on October 3.

The Bank of Israel raised the interest rate by 0.75% today to 2% - the steepest rate hike since June 2002. In doing so the Monetary Committee, headed by Bank of Israel Governor Prof. Amir Yaron, is acting aggressively to restrain inflation, which is currently at an annual rate of 5.2%, the highest rate for 14 years, and well above the annual inflation target range of 1%-3%.

Bank Leumi chief economist Gil Bufman expects the Bank of Israel to raise the interest rate by a further 0.5% to 2.5% at the Monetary Committee's next meeting on October 3. "At this interest rate level, the Bank of Israel has already begun to approach the neutral level, which is expected to reflect the real interest rate in 2023 that is not negative, on the assumption that inflation is about 2.4% in 2023. Depending on a string of data, it's possible there would even be another rate hike by the Bank of Israel by a further 25 basis points to 2.75%, and then the hikes will halt."

Psagot chief economist Guy Beitor points out that the Bank of Israel states that the increase in the inflation environment and solid growth and a tight labor market justify the continuation of the interest rate hike process. "According to the wording that we see that central banks use around the world - the Bank of Israel also continues to blur the future direction, when they write that the pace of interest rate increases will be set by inflationary developments. In our estimation, the inflationary dynamics in Israel continue to worsen when, unlike the US and Europe, in Israel we still do not see signs of any slowdown in economic activity, which means that the domestic inflationary pressure is expected to increase, led by the service industries, which gives the Bank of Israel leeway to continue to aggressively tighten policy. Therefore, in our estimation, as far as the Bank of Israel is concerned, the way is paved for continued interest rate increases. In our estimation, by the end of the year, the interest rate is expected to reach a level of 3%-3.25%."

Harel head of economics and research department Ofer Klein said, "Looking ahead, the sharp appreciation of the shekel and the fall in global commodity prices (assuming they persist) support the convergence of general inflation to the target in about a year, but the high inflation coming from non-tradable products (such as housing) will oblige the Bank of Israel to continue raising interest rates in the coming months as well. We anticipate another increase of half a percentage point on October 3, which will also be affected by the decisions of the central banks in the US and the Eurozone to continue raising interest rates significantly during September."

Leader Capital Markets analyst Yonatan Katz wrote, "The Bank of Israel continues to surprise the markets with the pace that it is raising interest rates with a 0.75% increase today. The reasons are known: acceleration in inflation, robust economic activity, a tight labor market (the employment rate is higher than before Covid) and housing prices continue to rise. On the other hand, inflation expectations have decreased and are within the target range and global activity continues to moderate. This is another illustration of the hawkish nature of the Monetary Committee. This time it will be interesting to see if the decision was made unanimously, similar to the previous interest rate decisions, (from the beginning of the year)."

Mizrahi-Tefahot Bank market economist Yonie Fanning said, "The interest rate hike is made possible by the strong labor market, which continues to be supported by stable activity in the tech industry, despite the global upheavals. Similar to the situation in the US, we believe that the strengthening of the local currency has not yet been fully reflected in the price index data. In addition, the interest rate hike will also support the shekel, and is a continuation of the implementation of the bank's inflation-focused policy."

Published by Globes, Israel business news - en.globes.co.il - on August 22, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Bank of Israel Credit: Shutterstock Alon Adika
Bank of Israel Credit: Shutterstock Alon Adika
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