Israel rates set to peak around 4% and curb inflation

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The Bank of Israel is near the end of an aggressive interest rate hike cycle that should be enough to bring inflation back into its target range, deputy governor Andrew Abir said.

On Monday, the central bank raised its benchmark interest rate by a half-point to a 14-year high of 3.75 percent, the seventh increase in a front-loading process that has taken the rate up from 0.1 percent in April.

Israel’s annual inflation reached 5.3 percent in November, for its highest since October 2008, and the central bank projects the rate will dip to three percent by the end of 2023. Israel has an official annual target of one to three percent.

“Our central scenario is that interest rates rising to around four percent or maybe just a bit over should be sufficient to bring inflation back into its target,” Abir told Reuters, citing a global trend of central bank rate hikes and looser supply side factors.

He warned, however, that nothing was certain.

“If inflation was to start spiralling upwards, we’ll have no alternative but to keep pushing up interest rates,” he said. “We don’t think that’s the likely scenario.”

Abir said once rates reached around four percent, the Bank of Israel would need to be patient since the inflation rate was not expected to decline immediately. “The pace of that deceleration of inflation will be something we will be closely looking at.”

The next rates decision is set for February 20.

Another variable is how Prime Minister Benjamin Netanyahu’s new government chooses to implement expensive coalition deals that could cost billions of shekels.

However, Abir said much of that had already been incorporated in the central bank’s macroeconomic estimates.

He urged the government to spend on areas that would have a positive impact on economic growth since financial markets were “generally unforgiving”.

“We had a very good example of that in the UK recently,” Abir said. “They (markets) will be quick to react if they think the government is going in a direction that is detrimental to the Israeli economy.”

On Monday, Bank of Israel governor Amir Yaron said economic policymakers must not “take for granted” the high regard from rating agencies and international financial institutions.

Still, Abir said Israel’s economy was strong, with growth of 2.8 percent expected this year after about six percent in 2022, while employment was near historic highs, public debt was low, the high-tech sector robust and large foreign inflows help Israel maintain a current account surplus.

Given the resilient economy, it was unlikely that Israel would see a recession, he added.