ISRAEL AT WAR - DAY 138

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Israeli inflation higher than forecast in February, boosting odds of more rate hikes

Rise of consumer prices over past 12 months eased to 5.2% in February versus expectations of 5%; Bank of Israel governor signals interest rates will climb higher still

Sharon Wrobel is a tech reporter for The Times of Israel.

Illustrative: People shop at the Jerusalem Mahane Yehuda market, during the Jewish holiday of Passover, April 19, 2022. (Yonatan Sindel/Flash90)
Illustrative: People shop at the Jerusalem Mahane Yehuda market, during the Jewish holiday of Passover, April 19, 2022. (Yonatan Sindel/Flash90)

Israel’s annual inflation dipped to 5.2 percent in February, the Central Bureau of Statistics said on Wednesday, easing from 5.4% in January but quickening at a faster rate than forecast putting further pressure on the Bank of Israel to hike interest rates again next month.

The consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, rose by 0.5% in February above analysts’ expectations of 0.3%, and bringing annual inflation over the past 12 months to 5.2% up from 5.4% in January. Analysts had expected an annual rate of 5%.

In February, increases were seen in the cost of fresh vegetables and fruits which rose 3.8%, culture and entertainment costs were up 0.9%, transportation rose 0.5%, and housing was up 0.4%. These were offset by declines in the prices of clothing and footwear, down 3.3%, and communication, down 0.4%, according to the statistics bureau.

Rents on renewal of contracts rose 4.4% and rents on contracts for new tenants increased 7.5%.

Although February inflation eased to the lowest reading since October, the rate remains well above the government’s price target range of between 1% to 3%. That’s despite steps taken by the Bank of Israel to rein in rising inflation. The central bank has over the past year steadily hiked its benchmark interest rate from a record low of 0.1% last April in a bid to bring down price growth.

In February, the Bank of Israel raised interest rates for the eighth straight meeting, lifting the key lending rate by 50 basis points to 4.25% — the highest level since 2008.

The Bank of Israel’s monetary policy committee will announce its decision on the next interest rate move on April 3.

Bank of Israel Governor Amir Yaron speaks in an interview with CNN aired March 15, 2023. (Screenshot: CNN; used in accordance with Clause 27a of the Copyright Law)

“We are absolutely determined to bring inflation back down to its target and if that means continuing raising rates and that is our primary tool that’s what we will do,” Bank of Israel Governor Amir Yaron told CNN in an interview late on Tuesday.

“We have a thriving economy partly because of the growth and investment in the high-tech sector which allows for more consumption and for more spending,” Yaron said. “That means that it will take a little bit more pain, probably, in order to bring inflation back down to its target.”

“Our job to take inflation down today involves pain and in Israel it involves direct pain because many of the mortgages are tied down directly to the central bank interest rate,” Yaron said.

Bank Leumi chief economist Gil Bufman expects the central bank to increase borrowing costs by 25 basis points to 50 basis points in early April, depending partly also by how much central banks around the world will hike rates during the coming week.

“Inflation in Israel, which is hardly slowing down, is beginning to look unusual compared to other countries, where inflation is declining and this will be reflected in the continued increase in the Bank of Israel interest rate, even after central banks around the world have already completed the course of rate hikes,” Bufman wrote in a research report following the release of the CPI figures.

Bufman forecasts for inflation to continue to hover above 5% in the next few months, and sees inflation over the next 12 months to be close to 4%, prompting the Bank of Israel to continue raising interest rates in the coming months to about 5% and higher, particularly if the weakening of the shekel continues.

Meanwhile, the central bank governor also warned about the danger of slowing rate rises too early.

“We know from the past that if you stop too early inflation can come back with a vengeance and therefore I predict that at least around the world we will see rates continue to go up and they will stay up for quite a bit longer,” Yaron cautioned.

Israel’s economy expanded 6.5% in 2022 growing at a slower pace than the fast 8.6% expansion in 2021. 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%.

“Israel has had great economic performance in the last couple of years,” Yaron said. “We are on our way to 3% economic growth in 2023 and the hope is to go back to 3.5% in 2024.”

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