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Bank of Israel raises interest rate to highest since 2007

Reuters/Ronen Zvulun
Israel's economy grew at a faster than expected three percent annualised rate in the second quarter from the prior three months
  • Policymakers determined to reach inflation target
  • Governor calls for consensus regarding judicial plans
  • Economists believe tightening cycle near end

The Bank of Israel has raised its benchmark interest rate by another quarter of a percentage point, the ninth straight meeting it has increased rates amid a battle against inflation that remains above five percent.

Bank governor Amir Yaron said he hoped the cycle of rate hikes, which began a year ago, was coming to an end.

He also urged the government to reach a broad consensus regarding a planned overhaul of Israel’s judiciary, a highly-contested move that he said has already impacted the economy.

The central bank lifted its key rate to 4.5 percent – its highest level since 2007 – from 4.25 percent, in line with a Reuters poll of economists. Last April policymakers began raising the rate from 0.1 percent and have been aggressive during a front-loading process that analysts believe is close to over.

“Economic activity in Israel is at a high level and is accompanied by a tight labour market, although there is some moderation in a number of indicators,” the bank said in its decision.

Policymakers remained determined to bring inflation back within the government’s one-to-three percent annual target range, Yaron said. The annual inflation rate stood at 5.2 percent in February, slightly lower than a 14-year high of 5.4 percent in January.

Israel’s economy grew a faster than expected 6.4 percent in 2022, although growth is expected to slow to below three percent this year amid the steep rate hikes.

The Bank of Israel’s research department forecast that GDP was expected to increase by 2.5 percent in 2023, down from a previous estimate of 2.8 percent, and kept its forecast of 3.5 percent growth in 2024.

It forecast inflation for the coming year to be 3.4 percent, compared with a previous forecast of three percent and the interest rate for one year from now reaching 4.75 percent, versus a previously estimated four percent.

Liam Peach, an economist at Capital Economics, said the central bank sounded “slightly less hawkish than at its previous meeting”.

“Inflation pressures are likely to remain strong this year, but the door for further tightening appears to be closing and we think there will be just one more 25-basis-point interest rate hike in this cycle,” he said.

Judicial overhaul

Yaron concluded his speech at a news conference by weighing in on Prime Minister Benjamin Netanyahu’s plan to enact sweeping changes to the Israeli judiciary.

The proposal to limit the Supreme Court’s power to strike down government decisions while according coalition lawmakers more power in appointing judges has ignited months of massive protests nationwide.

“The uncertainty and the events we witnessed in recent weeks have naturally also had an impact on the Israeli economy,” Yaron said. “I am of the opinion that to the extent a decision will be reached that reflects a broad agreement through dialogue and collaboration, the economy will also be better off for it.”

He said it was “more complicated than ever” to compile an economic forecast given the uncertainty in Israel.

However, one possible scenario he cited from the bank’s researchers on potential fallout from the government’s plans showed a negative impact of 0.8 percent to 2.8 percent of GDP annually for three years.

“Most of the decline in GDP, in this case, derives from a marked adverse impact on investment in the economy, due to an increase in uncertainty and the risk premium,” he said.