Today's interest rate announcement by the Bank of Israel was especially hawkish. In line with its colleagues in the most recent announcement by the US Federal Reserve, the Bank of Israel Monetary Committee is raising interest rates at a pace not seen in more than a decade. In doing so, the Bank of Israel continues to demonstrate determination in tackling inflation, even if it causes a slowdown in the economy, while showing no concerns about a recession.
For starters, future interest rate plans have now changed and the Bank of Israel is no longer raising interest rates, in what it termed earlier this year as 'a gradual process.' Moreover, the forecast by the Bank of Israel research department is that interest rates will reach 2.75% by the second quarter of 2023, above its previous estimate of 1.5%. When asked by "Globes," at the press conference earlier today, if a 0.5% hike will become routine, Bank of Israel Governor Prof. Amir Yaron sidestepped the question and said that he could not commit to any particular pace. The forecast is for an interest rate of 2.75% in less than a year and he does not know at what speed he will get there.
Inflationary pressures worldwide are not expected to moderate and the Bank of Israel has revised its forecast for inflation upwards for the second time in the past six weeks. At the start of the year the Bank of Israel research department predicted 1% inflation in 2022, revising it upwards to 3%, after Russia's unexpected invasion of Ukraine. At the end of May it was revised upwards to 3.6% and today revised upwards further to 4.5% in 2022, moderating to 2.4% in 2023, up slightly from the previous forecast of 2%.
The Bank of Israel is trying to lower inflation by stymieing demand and thus reducing the pressure on prices. Accordingly the Bank of Israel's GDP growth forecast has been cut to 5% from 5.5% in 2022 and to 3.5% from 4% in 2023. Although lowering the forecast stems mainly from the global economic environment, which indicates a slowdown in economic activity.
However, the rise in interest rates won't restrain price rises that originate overseas but will cause a chain reaction like putting up the price of credit. Bank of Israel Governor Prof. Amir Yaron answered "Globes" question about this and said that he does not see a problem in credit supply, which raises questions about the capital that Israel's big banks have recently raised. Regarding price rises overseas, the Bank of Israel sees this moderating next year.
The bottom line is that the Bank of Israel's rate hike, like the hikes made by the US Federal Reserve, have been at a pace not seen for many years, with thwarting the threat of inflation as the top priority, despite expectations that inflation will moderate next year. But raising interest rates is expected to have an impact on slowing down the economy, as can already be seen in the Bank of Israel's lower growth forecast. The question is whether the slowdown will develop into a recession, during a period of political deadlock. The answer of the Bank of Israel to this last point is that the Israeli economy has already proven that it can prosper, even during conditions of political uncertainty. The answer as to whether the slowdown will develop into a recession will probably depend on what happens outside of Israel.
Published by Globes, Israel business news - en.globes.co.il - on July 4, 2022.
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