The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has raised the interest rate by 0.25% to 4.5%, as expected. This is the ninth rate hike made by the Bank of Israel since April 2022, and follows three consecutive 0.5% hikes.
The Bank of Israel has taken a hawkish approach in its battle to curb rising inflation and is following in the footsteps of the US Federal Reserve and the European Central Bank, which have hiked interest rates over the past few weeks by 0.25% and 0.5% respectively.
The Monetary Committee is concerned that inflation is taking root and will become difficult to tame. The Bank of Israel said, "Inflation in Israel is 5.2% over the past 12 months, and is high in a wide range of CPI components. There has been some moderation in annual inflation, but the moderation is slower than previous assessments."
The Bank of Israel research department sees inflation falling to 3.9% by the end of the year and has cut its GDP growth forecast for 2023 from 3% to 2.5%. The Bank of Israel estimates that the juidicial overhaul could cut Israel's GDP by 2.8%.
However, the Bank of Israel expressed confidence that annual inflation will return to the 1%-3% annual target range over the next year. The Bank of Israel said, "Inflation expectations and forecasts for the first year from all sources increased, and are around the upper bound of the target range. Expectations derived from the capital market for the second year onward are all within the target range."
The Bank of Israel also noted that growth is slowing. "Economic activity in Israel is around the long-term trend, but its expansion has slowed relative to last year. The labor market is tight, and the employment rate remains at a level that reflects full employment. However, the job vacancy rate continues to decline moderately."
Published by Globes, Israel business news - en.globes.co.il - on April 3, 2023.
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