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The Bank of Israel Raises Interest Rates Again – This Time to 2%

Bank of Israel

Bank of Israel Building Jerusalem (Wikipedia)

The Monetary Committee of the Bank of Israel (BOI) raised interest rates for the second time in the last two months. This time the BOI raised the interest rate by 0.75 percentage points to 2 percent.

The BOI said that the Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment. The Bank of Israel Monetary Committee explained that this, in part, is why it decided to continue the process of increasing the interest rate. The pace of raising the interest rate, it said, will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.

This comes just seven weeks after the last raise. On July 4, the Bank of Israel raised rates by 0.5 percentage points to 1.25 percent. So, the latest raise is 3 times as much as the previous one.

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The last raise certainly had an effect on the value of the Shekel, which had dropped against the US Dollar in the period before. Since the previous monetary policy decision, the Bank of Israel said that the shekel strengthened by 6.9 percent against the US dollar, by 10.2 percent against the euro, and by 8.8 percent in terms of the nominal effective exchange rate.

In releasing its decision, the Bank of Israel explained that Inflation in Israel is above the upper bound of the target range, at 5.2 percent over the past 12 months. The increase in inflation is broad-based, said the BOI, with contributions from most CPI components.

Economic activity in Israel remains strong, added the bank, and the labor market remains tight and is in a full employment environment. GDP grew by 6.8 percent in the second quarter. Most GDP components grew significantly. GDP is above the pre-crisis trend line.

One-year inflation expectations from the various sources declined, and are within the target range. Expectations derived from the capital market for the second year onward remain within the target range, and long-term expectations are anchored at the midpoint of the range.

In addition, Israel continues to see a sharp rise in home prices. The upward trend in home prices, it said, is continuing to accelerate, with prices increasing 17.8 percent in the past 12 months. There was also a rise in the monthly pace of rent price increases, which reached 0.7 percent in July.

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