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Bank of Israel sends interest rate skyward to shoot down inflation

The Bank of Israel has raised its benchmark interest rate by half a point to 1.5 percent, as the nation’s economists ramp up their fight to tame rampant inflation.

The rate jump comes months after the bank surprised economists by raising the rate from 0.35% to 0.75%, which was higher than predicted. Many now expect the rate to eventually reach 2%. This comes after the bank kept the rate to a minimal 0.01% for several years.

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 BoI, inflation in Israel over the last 12 months is at 4.1%, and it will get worse before it gets better, with estimates showing it rising to 4.5% for 2022 before dropping down to 2.4% the next year. It notes, though, that other developed economies have even higher rates. In the US, inflation is at 8.6%, according to figures released in May.

While the bank says the economy is continuing to grow,  it warns 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.”

Israelis set up tents on Rothschild Boulevard in Tel Aviv to protest against soaring housing prices and social inequalities, on June 19, 2022. (Tomer Neuberg/Flash90)

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

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