For the eighth time since last April, Governor of the Bank of Israel Amir Yaron is expected to announce an interest rate hike today. The decision will be made at a meeting of the bank’s Monetary Committee later in the day. The central bank’s rate currently stands at 3.75%.
In the wake of last week’s Consumer Price Index reading, which was higher than forecast, and indicated inflation running at its highest rate in fourteen years, analysts have become strengthened in their view that the Bank of Israel will raise its rate by 0.5% to 4.25%, which will be the highest level since 2008.
If this is what happens, we will once again see the limitations of the Bank of Israel’s forecasts. Just last month, the bank estimated that its interest rate would peak at 4% in the course of 2023. In January 2022, it estimated that its interest rate at the end of the year would be 0.1-0.25%. In fact, last year ended on an interest rate of 3.25%, because of the upsurge in inflation in Israel and around the world.
"Inflation showing no signs of moderating"
Bank Hapoalim chief strategist Modi Shafrir sees a high probability that the central bank will raise its rate by 0.5% today. "The only factor supporting a more moderate rise in the interest rate is the pace of interest rate hikes in the US, although some members of the Federal Open Market Committee have already spoken of the possibility of a sharper rate hike in its next decision," he says.
The annual rate of inflation reached 6.4% in the US in January, which represents a decline but which is still higher than the forecast rate of 6.2%. US analysts therefore see a high probability that the Federal Reserve will continue to raise rates. The US rate currently stands at 4.75%.
Meitav Dash chief economist Alex Zabezhinsky similarly believes that the Bank of Israel will probably raise its interest rate by 0.5%, with inflation showing no signs of moderating. He sees inflation coming within the Bank of Israel’s 1-3% target range, but thinks that in current circumstances the bank will give greater weight in its decision to the actual current rate of inflation than to forecasts for the rest of the year.
In the background: Housing prices and a weakening shekel
Last month, the Monetary Committee announced a further interest rate hike. Unlike in most of the decisions since February 2022, however, the decision was not unanimous. Five committee members supported a rise of 0.5% but one sought a rise of 0.75%.
In its announcement last time around, the Monetary Committee set out a number of factors besides inflation itself that influenced its decision. Most of them still apply.
Among them, the committee mentioned the large rise in housing prices last year. According to the home price index released last Wednesday, prices have continued to rise, although the rate of increase has come down. The current index, covering December 2021 to December 2022, gives an annual rate of increase of 17.1%, whereas the previous reading was 20.3%.
Another factor in the last interest rate decision was the depreciation of the shekel versus the US dollar and the euro. Since then, the shekel has been fairly stable against the dollar, but has continued to weaken against the euro (by 3.7% since the beginning of the year).
In the light of the data and analysts’ forecasts, it looks as though we shall see a significant interest rate rise today, and that there will be further rises in 2023 as the fight against inflation continues.
Published by Globes, Israel business news - en.globes.co.il - on February 20, 2023.
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