Bank of Israel raises interest rate by 0.75%

The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has raised the interest rate by 0.75% to 2%. The hawkish move has been made in order to combat rising inflation, which has reached 5.2% over the past year in Israel - the highest inflation rate since 2008. This is the most aggressive rate hike made by the Bank of Israel since June 2002.

This is the fourth rate hike made by the Bank of Israel since April, after raising the rate from its historical low of 0.1% to 0.35% in April, and then by a further 0.4% to 0.75% in May and to 1.25% in early July.

This very aggressive move by the Bank of Israel follows the unexpectedly high Consumer Price Index reading for July of 1.1%, which lifted annual inflation more than 2% above the Bank of Israel's 1%-3% annual target range. The sharp GDP growth figure of 6.4% in Israel in the second quarter, when economists had forecasted a slowdown, also supports an aggressive rate hike.

The Bank of Israel said, "The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment. The Committee has therefore decided to continue the process of increasing the interest rate. The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals."

Despite its hawkish move to tackle inflation, the Bank of Israel issued soothing comments about medium to long term inflationary expectations. "One-year inflation expectations from the various sources declined, and are within the target range. Expectations derived from the capital market for the second year onward remain within the target range, and long-term expectations are anchored at the midpoint of the range."

The hike could further strengthen the shekel by closing the interest rate gap with the dollar. the Bank of Israel observed, "Since the previous monetary policy decision (July 4), the shekel strengthened by 6.9% against the US dollar, by 10.2% against the euro, and by 8.8% in terms of the nominal effective exchange rate."

Higher rates could also help cool the housing market. The Bank of Israel said, "The upward trend in home prices continues to accelerate, with prices increasing 17.8% in the past 12 months. There was also a rise in the monthly pace of rent price increases, which reached 0.7% in July."

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