The Bank of Israel signaled on Monday that it will soon start gradually increasing the interest rate, even as it left its benchmark rate at its all-time low of 0.1%, retaining the figure for the 15th consecutive policy meeting.
The central bank cited Israel’s strong economic performance alongside the COVID-19 pandemic and said indications point to “continued strong activity.” The bank also cited the inflation rate, which reached above its target range since the last policy meeting in early January, and rising consumer and housing prices.
“In the coming months, conditions will allow for the start of a gradual process of raising the interest rate in line with the path of inflation and the pace of growth and employment,” the Bank of Israel said in a statement Monday.
The announcement signaled a departure from the existing policy over the past two years. The central bank’s monetary policy committee cut the interest rate from 0.25% to 0.1% at the start of the global health crisis and has left it in place ever since.
The bank said an upcoming higher interest rate would “continue supporting the achievement of the monetary policy goals and… ensure the continued proper functioning of the financial markets.”
Inflation in Israel rose to 3.1% in January, slightly above the bank’s upper range of 3%. The shekel has weakened by 3.3% against the US dollar at a current 3.22 conversion rate.
The bank said economic activity “continues apace in most fields” and cited the recent Central Bureau of Statistics report that said Israel’s economy grew by 8.1% in 2021, surpassing previous forecasts and marking the highest financial growth rate recorded in Israel in 21 years.
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%.
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.
Meanwhile, labor market data and employment levels were “not far from the pre-crisis levels,” the central bank said Monday, even as it noted a decline in actual labor inputs “due to the high number of employees in isolation” due to the coronavirus Omicron wave.
“The average number of employees who were absent from their workplace for an entire week in January was about 70,000 higher than the December average,” the bank indicated.
The broad unemployment rate declined to 5.6% in January.
The Bank of Israel said that although the Omicron wave’s impact on the global economy has been relatively moderate, the risk of additional morbidity cycles remains and is leading to “continued uncertainty regarding the expected intensity of economic activity.”