Bank of Israel raises interest rate to 1.25% to rein in inflation

Central bank says inflation over the past 12 months reached 4.1%, with estimates showing it rising to 4.5% for 2022

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

The Bank of Israel raised its benchmark interest rate by half a point on Tuesday to 1.25 percent, as the nation’s economists ramp up their fight to tame rampant inflation and spiraling housing costs.

The rate jump comes months after the bank raised the rate from 0.35% to 0.75%, which was higher than predicted. Many now expect the rate to eventually top 2%.

The move will send adjustable-rate mortgage payments further up, on top of already-high housing prices that rose by about 15% over the past year, in the biggest rise in over a decade.

The interest hike followed a rate increase in April from an all-time low of 0.1% to 0.35% after the bank kept the minimal rate for several years and throughout the COVID-19 pandemic. It was the first rate increase since November 2018.

In February, the central bank indicated that it would start gradually increasing the interest rate to tamper inflation, citing Israel’s strong economic performance and indications pointing to “continued strong activity” alongside a spiraling energy crisis sparked by Russia’s war on Ukraine and a slowdown in economic activity in China due to an increase in COVID-19 morbidity and the disruption to the global production chain.

The higher rates are designed to restrict the flow of money by making borrowing less attractive, eventually dampening consumer demand, and easing inflationary pressures wrought by an undersupply of goods and an oversupply of cash.

According to the central bank, inflation in Israel over the last 12 months reached 4.1% with estimates showing it rising to 4.5% for 2022, before dropping down to 2.4% next year. These figures are higher than the upper ranges of 3% for 2022 and 2% in 2023, estimated by the bank in January.

The bank noted, though, that other developed economies have even higher rates. In the United States, inflation is at 8.6%, according to figures released in May.

People shop for groceries at the Rami Levy supermarket in Modi’in on February 1, 2022. (Yossi Aloni/Flash90)

According to figures published in June, Israel’s Consumer Price Index, a measure of inflation, tracks the average cost of household goods, rose by 0.6 percent in May, slightly below economists’ predictions of 0.7-0.8%. Prices are up 2.8% since the start of 2022.

“We are in a complex period in which significant processes are taking place, both in the local economy and in the global economy,” said Bank of Israel Chief Amir Yaron in a press briefing Tuesday.

“Our main role is to work to bring inflation back to the target range, while maintaining as high a level of economic activity as possible,” he added.

On Israel’s labor market, the bank said the country’s unemployment rates reached their pre-pandemic levels, but pointed to an ongoing shortage of workers as constraining the operations of businesses in most industries.

“The labor market continues to be tight,” Yaron said, “especially in industries characterized by high demand for workers” — like the high-tech sector. These factors also have an impact on inflation, he said.

Israelis set up tents on Rothschild Boulevard in Tel Aviv, to protest against the soaring housing prices in Israel and social inequalities, on June 19, 2022. The placard protests soaring rental prices, and translates roughly as ‘Landlords need not be pigs.’ (Tomer Neuberg/ Flash90)

With protests over housing prices ratcheting up again, the central bank confirmed that home costs skyrocketed more than 15% over the past year, “a significantly higher rate than in past years.” However, it said those numbers have begun to show signs of leveling off.

While the bank said the Israeli economy was continuing to grow, it warned that “the possible slowdown in global economic activity in view of the effects of the war in Ukraine and the slowdown in manufacturing activity in China, as well as the political uncertainty in Israel, may have a negative impact on economic activity.”

The bank forecasted that GDP will grow at a rate of 5% in 2022 and 3.5% in 2023, lower than its February projections for 5.5% for 2022 and 5% for 2023. Israel saw staggering growth of 8.1% in 2021, the highest since 2000, when Israel’s growth rate stood at 8.4%.

Although the estimated growth rate for 2022 was a “slightly lower” than expected, Yaron said it was “definitely growth that reflects a strong level of economic activity.”

The Israeli economy, said the bank chief, “is in a strong position in many respects. Growth is high, the labor market is tight, the government deficit is low, tax revenues are rising, and businesses continue to report an improvement.”

On a less positive note, another national vote — slated for November 1 — presented “an environment of political uncertainty” that was “not good for the economy.”

But, the Israeli economy has “demonstrated an impressive ability to grow and prosper in the short term, even in conditions of uncertainty,” he noted.

Lawmakers surround then-foreign minister Yair Lapid (left), the incoming interim prime minister, and outgoing premier Naftali Bennett (right) in the Knesset, following a vote to dissolve parliament for new elections, on June 30, 2022. (Olivier Fitoussi/Flash90)

Yaron said that in order to ensure future economic growth, Israel needed to exercise further fiscal responsibility and that the next Knesset would need to finalize a state budget “upon taking office while advancing the necessary reforms and investments.”

These statements echoed remarks he made last month at an economic conference in Jerusalem, where he said that passing a national budget was an “economic task of the highest order for any government, and it is vital for the continued advancement of economic reforms that are essential in accelerating growth and raising the standard of living.”

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