Bank of Israel Governor Amir Yaron reportedly called an emergency meeting late Wednesday to discuss stabilizing the country’s financial picture, after a two-day rollercoaster that has seen the shekel wilt to its weakest position in years amid rampant investor worries over the government’s judicial overhaul and rising interest rates.
The meeting of the Financial Stability Committee, which Yaron chairs and which normally only meets once a quarter, underlined fears in Israel that a confluence of factors could lead to a downturn, as the nation attempts to emerge from a pandemic that halted years of strong economic growth.
There was no official confirmation of the meeting, which was widely reported on in Hebrew language media.
Interest rate hikes, ballooning inflation, and an unstable shekel have wrought uncertainty among investors, along with the government’s ongoing pursuit of a controversial overhaul to the judiciary that critics say will make the country less attractive for foreign money.
On Monday, the central bank’s monetary committee decided to lift its benchmark interest rate from 3.75% to 4.25%, the highest level since 2008.
The rate hike, coupled with losses on Wall Street and the advancement of a bill shaking up Israel’s judiciary, bolstered a steady weakening of the shekel, sending it to NIS 3.66 against the greenback Wednesday, a fall of 2.6 percent from Monday’s rate of NIS 3.56. The local currency has weakened by over 8% against the dollar since late January.
Senior Likud ministers blamed the shekel’s losses on the rate hike, which they argued was not justified.
Both Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich defended the central bank and its independence in setting monetary policy.
But the two have also largely dismissed warnings that the controversial judicial overhaul, to cement government control over judicial appointments and constrain the High Court’s ability to review Basic Laws, could severely impact investor mood.
The ruling coalition’s plan to upend the judiciary has been weighing on market sentiment amid fears over its negative impact on the country’s credit rating, which could trigger an outflow of capital and scare away investors.
Jacob Frenkel, who served as bank governor from 1991 to 2000, urged the government on Wednesday to rethink its plans, warning that “irresponsible decisions could ruin it all.”
“We have a situation of total uncertainty: economic uncertainty, political uncertainty and a lack of certainty in institutions, which affects all aspects of the economy,” he said in an interview with Channel 12 news.
The central bank has steadily raised its benchmark interest rate from a record low of 0.1% last April to 4.25%, in a bid to rein in inflation which has been hovering above 5% and bring it back into the government’s target range of between 1% to 3%. Meanwhile, a weaker shekel makes imported goods more expensive which in turn fuels consumer prices, such as the cost of gasoline.
Despite the steady interest rate hikes, the consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, rose by 0.3% in January, bringing the annual rise over the previous 12 months to 5.4%, the highest level since 2008, according to data released by the Central Bureau of Statistics on February 15. Economists had expected the January figures to top out at 0.1%.
Israel’s economy expanded 6.5% in 2022, growing at a slower pace than the fast 8.6% expansion in 2021, the Central Bureau of Statistics said last week. Gross domestic product rose a seasonally adjusted, annualized 5.8% in the fourth quarter of 2022 surpassing analysts’ expectations. In 2022, the average growth among OECD countries was 2.8%.