Bank of Israel raises interest rate to 4.25%, highest since 2008, amid inflation pressures

The Bank of Israel increases the benchmark interest rate for the eighth straight meeting, raising its key lending rate by 50 basis points to 4.25%, the highest level since 2008, as the central bank battles rising inflation pressure and a weakening shekel.

The move comes after inflation unexpectedly quickened in January amid robust economic growth and uncertainty over the repercussions of the proposed changes to Israel’s legal system led to a weakening of the shekel. The local currency has weakened about 3 percent against the dollar so far in February.

“The Israeli economy is recording strong economic activity, accompanied by a tight labor market and an increase in the inflation environment,” the central bank says in the rate decision statement. “The Committee has therefore decided to continue the process of increasing the interest rate.”

“Since the previous policy decision, exchange rates have been characterized by considerable volatility — in the beginning of the intermeeting period the shekel strengthened, and later on the trend changed and the shekel depreciated by approximately 5% in the last month,” it adds.

Economists at Bank Hapoalim, Israel Discount Bank, and Leader Capital Markets are among forecasters who expected a hike of 0.5% and estimate that borrowing costs will need to remain above 4% throughout the year as inflation pressures are rising.

The Bank of Israel has steadily raised its benchmark interest rate to 4.25% from a low of 0.1% last April in a bid to rein in inflation and bring it back into the government’s target range of between 1% to 3%.