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Bank of Israel raises interest rate for first time since 2018 to limit inflation

Central back raises benchmark interest rate to 0.35% from 0.1%, as inflation rate reaches 3.5% and economy registers ‘strong financial activity,’ bank says

Governor of the Bank of Israel Amir Yaron attends a Finance Committee meeting in the Knesset in Jerusalem, on June 23, 2021. (Yonatan Sindel/Flash90)
Governor of the Bank of Israel Amir Yaron attends a Finance Committee meeting in the Knesset in Jerusalem, on June 23, 2021. (Yonatan Sindel/Flash90)

The Bank of Israel’s monetary policy committee said Monday it was raising the benchmark interest rate to 0.35% from the current 0.1%, as it has signaled it would, in order to limit rising inflation and housing prices in Israel.

The announcement marks the first time the central bank has decided to raise the interest rate since November 2018.

The central bank indicated it would start gradually increasing the interest rate in February, citing at the time strong economic performance alongside the COVID-19 pandemic and indications pointing to “continued strong activity.”

The bank also cited the inflation rate, which had risen above its target range since the last policy meeting in early January, as well as rising consumer and housing prices.

The inflation rate in Israel reached 3.5% in February, slightly above the bank’s upper range of 3%, and is expected to reach 3.6% during 2022, while dropping to 2% in 2023, the bank said, estimating that the interest rate would go down to 1.5% in about a year.

Still, despite “inflation in Israel rising in the past few months, it is still significantly lower than inflation rates in most countries in the world,” the bank said in a statement.

The statement noted that “the war in Ukraine and rising morbidity in China deepen the disruptions to global supply chains, increase inflation and lead to a slower growth pace of the global financial system.”

The Israeli economy, however, has “registered strong financial activity,” leading to the bank’s decision to gradually raise its interest rate.

Bank of Israel Governor Amir Yaron was cited by The Marker as saying on Monday that “the Israeli economy is strong and has nearly completely overcome the impact of the pandemic. The gap in GDP has closed and the job market has recovered, registering a high employment rate alongside a demand for workers. The rapid growth characterizes a dynamic economy with the ability to contain changes.”

The bank said that the continued gradual increase of the interest rate will be determined by live data and changing inflation rates, “in order to continue to strive to reach the defined goals” and with a focus on decreasing inflation rates.

Yaron noted that the central bank’s main responsibility is “maintaining the stability of prices,” but stressed that “alongside the inflation, I would like to point out the cost of living, which is different than the rate of inflation.

“The cost of living is an important issue for the Israeli public and is reflected in many areas — consumerism, housing prices, and more. Addressing the cost of living should be done by introducing important reforms, some of which are being formalized by the government.”

Bank of Israel Governor Prof. Amir Yaron attends a press conference presenting the the Israel bank’s annual report in Jerusalem on March 31, 2019. (Yonatan Sindel/ Flash90)

At the beginning of the global COVID-19 pandemic, the central bank’s monetary policy committee cut the interest rate from 0.25% to 0.1%, where it has remained until now.

The bank has indicated before that a higher interest rate would “continue supporting the achievements of the monetary policy goals and… ensure the continued proper functioning of the financial markets.”

According to CBS data, the fourth fiscal quarter of 2021 saw a staggering 16.6% growth in GDP, bringing the yearly average to 8.1%, the highest since 2000, when Israel’s growth rate stood at 8.4%.

In February, the Bank of Israel projected GDP growth at 5.5% for 2022 and 5% for 2023.

According to the data, the consumer price index, which measures the price of an average market basket of consumer goods, rose by 0.2% in January and by 3.1% in the past year.

Housing prices marked a more dramatic increase — 11.3% in 12 months.

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