The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has raised the interest rate by 0.25% to 4.75%, as expected. This is the tenth rate hike made by the Bank of Israel since April 2022. The latest hike comes after an unexpectedly high Consumer Price Index (CPI) reading for April published last week, which keeps annual inflation in Israel at 5%. Unlike in the US and Europe, inflation shows no signs of moderating in Israel.
This is the highest the interest rate has been since 2006. The Bank of Israel has previously forecast that the rate would not reach 4.75% until the end of 2023.
Explaining its decision, the Bank of Israel said, "Economic activity in Israel is at a high level, and is accompanied by a tight labor market, although there is some moderation in a number of indicators. Inflation is broad and remains high. Therefore, the Monetary Committee decided to increase the interest rate. The interest rate path will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goal."
The Bank of Israel said in its interest rate announcement, "Inflation in Israel over the past 12 months remains above the upper bound of the target range (1-3%), at 5%, and is high in a wide range of CPI components. Looking at the past 6 months, and even more so over the past 3 months, the pace of inflation is lower than the year-on-year inflation.
"Inflation expectations and forecasts for the first year from all sources 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."
However the Bank of Israel takes comfort from Israel's strong economic performance. "Economic activity in Israel remains strong, but some economic indicators point to a moderation in activity. GDP grew by 2.5% in annual terms in the first quarter, a relatively high pace once the temporary effects of changes in vehicle taxation are omitted. The labor market remains tight, and in a full employment environment, but the job vacancy rate is in a downward trend."
The Bank of Israel also noted that Israel's job market remains tight in a low unemployment environment.
On the housing market, the Bank of Israel said, "The number of purchases and new mortgage volume continue to decline. Home prices remained unchanged in April, following a slight decline in March. In contrast, the upward trend in rents continued, and the housing services component of the CPI increased in the past year to 7.2%.
Published by Globes, Israel business news - en.globes.co.il - on May 22, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.