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Bank of Israel raises interest rate to tame inflation

REUTERS/Ronen Zvulun
Bank of Israel Governor Amir Yaron said the monetary policy committee was front-loading rate increases to control inflation.

The Bank of Israel on Monday raised its benchmark interest rate by three-quarters of a percentage point for the second meeting in a row, citing its determination to move inflation back to within its target.

The central bank lifted its key rate to 2.75 percent from two percent in its fifth straight decision to hike rates and the highest level of rates since January 2012. In April, policymakers had begun raising the rate from 0.1 percent — an all-time low where it had stayed for the prior 15 decisions since a 0.15 point reduction at the outset of the COVID-19 pandemic.

Bank of Israel Governor Amir Yaron said the monetary policy committee (MPC) was front-loading rate increases to move inflation rate to its one-to-three percent annual target.

Israel’s annual inflation rate stood at 4.6 percent in August after reaching a 14-year high of 5.2 percent in July, stirring public anger at spiking living costs ahead of a November 1 election.

“We know that the process of increasing the interest rate takes some time to show its results,” Yaron told reporters. “(But) we are determined to return the inflation rate to within the target range and the steps we are taking today… emphasize that.”

He noted that inflation derives from strong domestic demand as well as external factors such as the war in Ukraine, high global energy costs and continued global supply chain disruptions.

Still, Yaron said, Israel’s economy is in a good place, especially relative to other advanced economies, with a high level of activity and a tight labour market. Israel’s economy grew an annualised 6.8 percent in the second quarter from the first quarter.

In updated forecasts, the central bank projected economic growth of six percent in 2022, up from a prior estimate of five percen, easing to a three percent pace in 2023. Inflation is expected at 4.6 percent this year, falling to 2.5 percent in 2023.

Bank of Israel economists forecast the benchmark interest rate at 3.5 percent in the third quarter of next year.

The shekel, which earlier on Tuesday hit a fresh 2-1/2-year low versus the dollar to a rate of 3.61, accelerated after the rates decision to 3.57.

Ahead of next month’s election, Yaron said the next government must focus on passing a new state budget and advance needed economic reforms.