Bank of Israel Raises interest rate by 0.75 percentage points to 2.75 percent

The Monetary Committee of the Bank of Israel (BOI) has decided to once again raise interest rates only a few months after the previous raise. This time the rate was raised by another 0.75 percentage points to 2.75 percent. The reason for the move was obvious – the need to counter the continuing worldwide growth in inflation.

Inflation has grown over the past 18 months for several reasons. The first was the world exiting the global Covid crisis, which brought with it supply chain problems. There was a sudden spike in global demand before the supply could catch up and so prices rose.

Then came the Russian invasion of Ukraine in March. This caused insecurity in the markets and sanctions imposed on Russia caused the price of oil to skyrocket. Any significant rise in oil prices always causes inflation to rise globally.

The BOI explained that economic activity in Israel remains strong, and according to National Accounts data GDP has been above the trend line for the past three quarters. The labor market remains tight and in a full employment environment. However, the moderation of global activity is expected to lead to some slowdown in economic activity. Inflation in Israel is above the target range, and is being recorded in a wide range of CPI components. However, it is within the lowest decile among the OECD countries.

Since the previous interest rate decision, the CPI declined by 0.3 percent in August. Inflation in the past 12 months is above the upper bound of the target range, at 4.6 percent. With that, inflation in Israel remains significantly lower than in most of the advanced economies. Net of energy and fruits and vegetables, inflation is 4.7 percent, unchanged from the previous month, and with the further neutralization of the effects of taxation and regulation, it is 4.4 percent. The pace of inflation of the nontradable components increased—partly in view of the increase in the housing services component—to 4.4 percent. In contrast, the annual pace of inflation of the tradable components moderated, to 5.1 percent, mainly due to the effect of declines in the price of oil and in the tax on fuel. In the Committee’s assessment, the monetary tightening processes in Israel and abroad, alongside the easing of the supply chain difficulties and declines in the prices of oil and other commodities will act to moderate inflation.

One-year inflation expectations are around the upper bound of the target range. Expectations for the second year and onward from the capital market are within the target range. Since the previous monetary policy decision, the shekel was particularly weak, falling by 8 percent against the US dollar, 6.2 percent against the euro, and by 5.9 percent in terms of the nominal effective exchange rate.

The global inflation environment continued to increase. In most countries, the inflation indices are significantly higher than the central bank targets and monetary tightening around the world therefore continues. In the US, growth forecasts for the coming months point to moderate growth. While the annual increase in the CPI declined to 8.3 percent in August, it was significantly higher than previously forecast. The Federal Reserve has significantly revised its interest rate forecast for the coming years, while lowering its growth forecast. It also increased the volume of its government bond sales. In the eurozone, despite the relatively high growth data in the second quarter, annual forecasts were revised downward in view of the effects of the energy crisis and the increasing monetary tightening.

In parallel the increase in inflation continues, and the overall index is at 10.0 percent. The ECB accelerated its monetary tightening, and increased its interest rate by 75 basis points—the largest increase the ECB has ever made. In the UK, the Bank of England’s monetary contraction policy continues, and the new government announced expansionary fiscal measures upon taking office, which led to a significant increase in government bond yields, and Bank of England intervention due to financial stability concerns. In a number of other countries where inflation is above the central bank target, there were increases in the interest rates.

Govenor of the BOI Prof. Amir Yaron commented, “Inflation in Israel, as in many countries, has risen above the upper bound of our target range. To deal with the rise in inflation, we on the Bank of Israel’s Monetary Committee continue to move forward with the process of monetary contraction, while taking measured steps and examining the range of economic developments in Israel and worldwide. We know that the process of increasing the interest rate takes some time to show its results.”