The Bank of Israel Monetary Committee headed by Governor Prof. Amir Yaron, which meets tomorrow to discuss the interest rate for January, is expected to raise the rate for its seventh consecutive meeting. Since April 2022, the rate has risen from an historic low of 0.1% to its current 3.25%. Most analysts expect the Bank of Israel to hike the rate by 0.5% while a minority predicts a 0.25% hike.
The latest consensus among analysts is that the Bank of Israel will continue raising the interest rate until it reaches 4%. Until just a few weeks ago most analysts forecast the rate rising to 3.5%-3.75% but the latest data has pushed their predictions higher.
Among the reasons for the latest forecasts are US Federal Reserve policy, which in its last rate decision said that tight monetary policy will continue and that interest rates would not start to fall in 2023. Another reason is inflation in Israel, which has reached an annual rate of 5.3% and is expected to rise even further with the announcement of the December Consumer Price Index (CPI) figures in two weeks.
So far Israel has been proud of its relatively low inflation compared to the rest of the world, but it seems that the gaps are closing. Inflation in the US has fallen, above expectations for two months in a row, while in Israel it has probably not yet peaked. As a result, the Bank of Israel may keep interest rates high for a longer period than even the US.
Meitav Dash chief economist Alex Zabezhinsky said, "I think the Bank of Israel's upcoming interest rate hike will be 0.5%." His explanation for another relatively aggressive hike lies in core inflation - inflation minus food and energy items. "In terms of inflation, and especially core inflation, the pace continues to rise. We expect a slight increase of 0.4% CPI for December."
Bank Hapoalim chief strategist Modi Shafrir also sees a 0.5% hike tomorrow. "Until two weeks ago, the market had priced in just a 0.25% rate hike, but today the market has priced in a 60% probability of an interest rate hike of 0.5% and a 40% probability of an interest rate hike of 0.25%."
Shafrir estimates that the December CPI will climb by about 0.3%, and will continue the trend in November, when inflation reached a 14-year high. The high rate of inflation is among the factor supporting an interest rate hike of 0.5%. On the other hand, factors supporting a 0.25% hike include a desire to create greater flexibility for the Bank of Israel in subsequent rate hikes.
Shafrir adds, "The market is currently pricing that the interest rate in Israel will peak at 4% and begin to decrease at the end of 2023. In the US, the market is pricing that the interest rate will reach up to 5% in May and will begin to decrease from September."
How do you explain the gap between Israel and the US?
"The Fed's interest rate rose much more, and more sharply. In addition, the economy there is expected to enter a recession in 2023, which supports a cut in the interest rate. In Israel, a slowdown is expected, not a recession, so in all likelihood the Bank of Israel is not expected to rush and cut the interest rate as soon as the Fed does."
Bank of Israel will revise forecasts
The anticipated rate hike won't be the only matter of interest in the Bank of Israel's announcement tomorrow. The research division is expected to publish its updated 2023 forecast for interest rates, growth and inflation.
In July, the research division predicted 2.4% inflation in 2023, while in October it raised the forecast to 2.5%. In July the research division predicted the interest rate rising to 2.75% in the second quarter of 2023 while in October the forecast was raised to 3.5%. in July the research division saw 3.5% GDP growth in Israel in 2023 but in October the growth forecast was cut to 3%.
Published by Globes, Israel business news - en.globes.co.il - on January 1, 2023.
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