The Bank of Israel has raised its interest rate in seven consecutive interest rate decisions since last April, this time by 0.5% to 3.75%. This is the highest level since the fourth quarter of 2008, and the longest series of rises for decades.
The amount of the interest rate hike was in line with the consensus among forecasters. Only a third of the analysts surveyed by Bloomberg estimated that the rise would be by a more moderate 0.25%.
The bank’s inflation, growth and interest rate forecasts were also updated. The Bank of Israel’s interest rate is expected to be 4.0% on average in the fourth quarter of 2023, 50 basis points higher than the Bank of Israel’s forecast in October.
After seven rises, altogether adding 3.65% to the interest rate in the past eight months, Yoni Penning, chief market strategist at Mizrahi Tefahot Bank, said that this was a move "of historic note." Guy Beitor, chief economist at Psagot investment House, said that the interest rate rise was in line with expectations, "but a sense of the end of a period is starting to creep in - the imminent end of the cycle of interest rate rises."
Beitor points out that, in comparison with previous decisions, the language of the Bank of Israel’s interest rate announcement placed much more emphasis on possible changes of direction. "Chiefly, the music of the decision was different. First of all, the Bank of Israel stated that, although inflation was broad, it had started to see a degree of moderation in some items in the Consumer Price Index. Then there was comment on the strong economic growth in Israel, but with the observation that growth had slowed in the second half of the year in comparison with the first half. The bank also started to give us hints that it was looking beyond the price rises we are seeing in the real estate market, saying that the number of building starts remained high but the number of transactions had fallen. Our immediate interpretation is that if they expect greater supply and less demand, they think that the Israeli real estate market will start to cool down soon, as we believe it will.
"In the end, the Bank of Israel continues to stress that the global economy is still slowing down and that the risk of a recession is rising. That is to say, the central bank has started to prepare the ground for the end of the rising interest rate cycle. This also emerges from the updated forecast of the Research Department, when they project that the interest rate will stand at 4.0% at the end of the year, just one rise of 0.25% away," says Beitor.
Bank Hapoalim chief market strategist Modi Shafrir says, "The governor stressed that further interest rate rises would be dependent on the economic data, particularly developments in inflation. He said that the Bank of Israel could in a certain scenario halt the rise in interest rates, but in another scenario could raise the interest rate more aggressively than forecast by the Research Department. In addition, Yaron said that ‘the interest rate will have to remain at a high level for a while.’"
The Bank of Israel’s next interest rate decision is due on February 20. Unlike Beitor, Bank Leumi chief economist Gil Bufman believes that unless the rate of inflation looks as though it is coming within the price stability target range of 1-3%, and if pessimistic scenarios such as further weakening of the shekel materialize, "there may be a rise in the interest rate beyond 4%." Bufman points out that the governor again stressed the economic risks liable to arise from over-expansive fiscal policy, "and also included in his remarks a terse warning against any attempt to damage the independence of the Bank of Israel."
Penning says that the next interest rate decision will be made against the background of continued contractionary monetary policy on the part of the US Federal Reserve, and that there is a high probability that the local rate will rise to 4%. "On the other hand, the decision after that, in early April, will in our view be made against a background of stability in the US, and will require a rethink of the local trend. If the shekel strengthens, that will of course contribute to this," he says.
"Given the Bank of Israel’s aim of reaching a positive real interest rate, probably of 1% or more, it can be expected to raise its rate further, beyond its previous forecast level," says Bufman. Bufman explains that the labor market in Israel continues to be tight, although the employment figures have moderated somewhat in the past few months, and the Bank of Israel will monitor developments in wages, distinguishing between wage trends in the public sector and in the private sector. "The governor said that the opening up of wage agreements in the public sector and the expected pay rises as a result could include linkage and other mechanisms that will affect future inflation," he says.
Another background factor to the interest rate decision is, as mentioned, the weakening of the shekel. "Since the last interest rate decision, the shekel has weakened against the US dollar by 1.6%, against the euro by 5.8%, and in in terms of the effective rate by 3.4%. It could be that this weakness was also caused by the election in Israel, and not just by global and local financial conditions." Bufman says.
Published by Globes, Israel business news - en.globes.co.il - on January 2, 2023.
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