FM Cohen: 'No justification' for central bank's decision

Netanyahu defends Bank of Israel’s independence after Likud members pan rate hikes

Finance Minister Smotrich acknowledges increases tough on households while dismissing ‘populist’ criticism by members of PM’s party, including call by foreign minister to intervene

Prime Minister Benjamin Netanyahu leads a faction meeting of his Likud party at the Knesset in Jerusalem, February 20, 2023. (Yonatan Sindel/Flash90)
Prime Minister Benjamin Netanyahu leads a faction meeting of his Likud party at the Knesset in Jerusalem, February 20, 2023. (Yonatan Sindel/Flash90)

Prime Minister Benjamin Netanyahu on Tuesday defended the Bank of Israel against criticism from within his government over its decision to increase the benchmark interest rate to its highest level since 2008, as the central bank struggles to contain rising inflation and a weakening shekel.

“Under my leadership, the Bank of Israel law that guarantees the independence of the monetary committee headed by the governor in determining the interest rate was passed,” Netanyahu wrote on Twitter in both English and Hebrew, referring to legislation enacted in 2010.

“Nothing will change it,” he added.

The premier’s tweet came after Foreign Minister Eli Cohen and MK David Bitan, both members of his Likud party, slammed the bank’s decision on Monday to hike the rate by 50 basis points to 4.25 percent, with Cohen going as far as urging government intervention.

It also followed Finance Minister Bezalel Smotrich’s similar defense of the bank.

“The independence of Israel’s central bank is fundamental for our strong and innovative economy. As finance minister, I stand firmly against populist statements threatening the Bank of Israel’s independence,” Smotrich tweeted in English and Hebrew.

“As a government, we will deliver a budget that invests heavily in infrastructure for economic growth as well as a package of assistance for those truly in need,” he added.

Finance Minister and head of the Religious Zionism Party Bezalel Smotrich speaks at a conference of the Religious Zionism party in Jerusalem, February 19, 2023. (Yonatan Sindel/Flash90)

The public rebuke of their colleagues in English was likely a bid to reassure foreign investors and ratings agencies that are already jittery about the impact of the planned judicial overhaul on the economy and would not look favorably on political interference in the bank’s monetary policy.

Smotrich’s Hebrew statement also acknowledged that the rate hike “does make it difficult for many households.”

The move came after inflation unexpectedly quickened in January amid robust economic growth and as 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% against the dollar so far in February.

Foreign Minister Eli Cohen arrives at the Prime Minister’s Office in Jerusalem, on January 29, 2023. (Yonatan Sindel/Flash90)

“I asked my friend, Finance Minister Bezalel Smotrich, to put together a plan with the Bank of Israel governor to stop interest rate rises,” Cohen wrote on Twitter.

Claiming that inflation was moderating, Cohen argued that “there was no justification for raising the interest rate today,” which he said would lead to further “abuse” of Israelis with mortgages.

Bitan, chair of the Knesset’s Economic Affairs Committee, called on Bank of Israel Governor Amir Yaron to restrain the interest rate hikes, “even if this will prolong the lowering of inflation… the public is not up to the challenge.”

“The cost of living is skyrocketing. [With the current policy] we may beat inflation, but the victims will be the citizens of Israel,” Bitan said.

Bank of Israel Governor Amir Yaron speaks during a press conference at the Bank of Israel in Jerusalem, January 2, 2023. (Yonatan Sindel/Flash90)

Despite the Bank of Israel’s steady interest rate hikes in recent months, 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 stand at 0.1% at most.

Israel’s economy expanded by 6.5% in 2022, slower than its faster 8.6% expansion in 2021, the statistics bureau said Thursday. 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%.

In recent weeks, concern among investors has grown that the government’s proposed judicial overhaul currently being advanced to curtail the power of the courts would weaken Israel’s justice system and negatively impact its credit rating, which in turn would harm the country’s prosperous economy, its local currency and trigger the start of an outflow of funds.

A man uses an ATM machine on Hillel Street in downtown Jerusalem on October 7, 2020. (Nati Shohat/Flash90)

Some local firms and startups have already begun to withdraw their money, at the behest of their overseas investors, to diversify risk and hedge their assets before the bills head to final approval.

“If the government continues to advance the legislation in its current form, the pressure on the exchange rate [shekel] will increase and is expected to lead to an increase in the inflation environment which supports a longer interest rate hike cycle,” IBI investment house chief economist Rafi Gozlan wrote in a note to investors on Monday

Bank of Israel chief Yaron also addressed the impending judicial reforms, telling the Kan public broadcaster on Monday that an independent Bank of Israel is “crucial” to the country’s economy.

Sharon Wrobel contributed to this report.

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