Israel’s central bank on Monday increased the benchmark interest rate for the sixth straight meeting, raising the rate by 50 basis points to 3.25% from 2.75% in a move to cool price growth.
“The Israeli economy is recording strong economic activity, accompanied by a tight labor market and an increase in the inflation environment,” the central bank said in the interest rate announcement.
The hike marks the central bank’s sixth move of monetary tightening since April, when policymakers had started raising the rate from an all-time low of 0.1%, where it had remained for more than a year and throughout the COVID-19 pandemic. The Bank of Israel has accelerated the pace of rate hikes in recent months in a bid to bring inflation back within the government’s 1% to 3% annual target range. In the last decision by the central bank’s monetary committee in early October, the key lending rate was raised by 75 basis points for a second straight meeting.
The consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, jumped by a higher-than-expected 0.6% in October, bringing annual inflation over the past 12 months to 5.1% — up from 4.6% in September and after hitting a 14-year high of 5.2% in July. The pace of price growth was led by increases in the cost of food, clothing, transportation and apartment maintenance, according to the latest data released by the Central Bureau of Statistics.
In the interest rate decision statement, the central bank cautioned about a slowdown of global economic activity and the increased risk of a recession, mainly in Europe, citing the war in Ukraine, the energy crisis in Europe, high inflation and monetary tightening, and the slowdown in China.
“Monetary policy tightening and moderation of activity abroad are expected to lead to some slowdown in economic activity in Israel as well, and a number of indicators are showing signs of the beginning of such a process,” the central bank stated. “In the Committee’s assessment, the monetary tightening processes in Israel and abroad, and the moderation of demand alongside the easing of the supply chain difficulties and the decline in commodity prices, will act to moderate inflation.”
Prior to the rate decision, economists at both Bank Leumi and Bank Hapoalim said in their forecast that economic indicators, including an acceleration in inflation and an increase in apartment prices, supported a rate hike of as much as 75 basis points to 3.50% at today’s decision. However, the central bank is likely to decide on a more modest rate hike of 50 basis points amid expectations that the pace of monetary tightening in the US and in Europe will start to slow down, they wrote in research notes.
“Similar to the trend by the world’s largest central banks and against the backdrop of increasing fears of the world’s largest economies entering a recession in 2023, the Bank of Israel decided to moderate the rate of interest rate increases – raised the interest rate by 0.50% – similar to our assessment and market expectations, but below the median of forecasters’ expectations who expected an increase of 0.75% (according to Bloomberg’s survey),” Bank Hapoalim’s chief strategist Modi Shafrir said in emailed comments following the interest rate decision.
Looking ahead, Bank Leumi economists see accelerated price growth in coming months with annual inflation peaking at 5.5%. In the coming 12 months, inflation is slated to decline to 3.5% and return to the target range by the end of 2023 as the Bank of Israel continues to lift the key lending rate at a similar pace as in recent months, Leumi analysts wrote in a research report.