The Bank of Israel has increased it’s interest rate; read why

Key Takeaways:

• To control inflation above 5%, the Bank of Israel raised its benchmark interest rate by half a point. This trend is anticipated to continue in the months to come.
• Israel’s annual inflation rose to a 14-year high of 5.3% in November from a previous high of 5.1% despite the rate increases.
• He says the new administration needs to be cautious when making decisions about the budget and the contracts for the public sector.

The Bank of Israel increased its benchmark interest rate by half a point and is expected to keep doing so in the coming months as it attempts to rein in inflation above 5%.

As anticipated, the central bank increased its key rate from 3.25 per cent to a 14-year high of 3.75 per cent. 

Although policymakers aggressively front-loaded the process of raising the rate starting in April, most analysts think the tightening cycle is almost complete.

Governor of the Bank of Israel, Amir Yaron, claimed that monetary policy was already “restrictive.” Still, he expressed worry about inflation, although it is lower than most of the West. 

The labour market is tight, and also the new administration plans to spend a lot to fulfil coalition commitments.

Yaron could not commit to that peak, even though the central bank’s economists predict that the key rate will reach 4% in a year — meaning there will only be one more quarter-point increase.

He said in a statement to reporters that data would continue to determine the rate of hikes. Yaron stated that “we won’t hesitate to raise rates further” and that he anticipates inflation to decline in the second quarter. “I think interest rates will have to stay high overall.”

Despite the rate increases, Israel’s annual inflation increased to a 14-year high of 5.3% in November from 5.1% in October. This is significantly higher than the government’s target range of 1% to 3% and adds to the public’s resentment over rising living expenses.

The central bank’s staff predicts that inflation will peak at 3% in one year and then decline to 2% in 2024.

Yaron declared, “We are committed to lowering the inflation rate and bringing it back to within the target range.

This week saw the inauguration of a new administration headed by Benjamin Netanyahu, whose coalition partners have high spending demands. Yaron issued a warning against an increase in the deficit and debt load.

According to him, the new administration must exercise caution regarding fiscal policy and public sector wage agreements. It’s important to understand that the Israeli economy cannot assume that the rating agencies and other international financial institutions will continue to hold it in high regard.

Israel’s economy expanded by an annualised 1.9% from the second quarter to the third quarter, which was slower than the 7.4% growth rate in the previous three months.

Based on the Bank of Israel’s revised forecast, growth is anticipated to be 2.8% in 2023 (down from 3%) and 3.5% in 2024.