Bank of Israel Building Jerusalem (Wikipedia)
The Bank of Israel (BOS) is raising interest rates again. The bank announced Monday that it will increase the interest rate by 0.5 percentage points to 3.25 percent.
It was just seven weeks ago when the BOS raised interest the last time. At the beginning of October, the Bank raised the rate by 0.75 percentage points to 2.75 percent.
The reason for the continued raises in the interest rate is simple – inflation. While the rate of inflation in Israel is not as bad as in Europe or the U.S., it is still high. At the end of October the inflation rate for the previous 12 month period was 5.1%.
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The Bank of Israel said that inflation in Israel is above the upper bound of the target range, at 5.1 percent over the past 12 months. Inflation can be seen across the board in a wide range of Consumer Price Index CPI (CPI) components.
One-year inflation expectations derived from the capital market are within the target range, explained the BOS, while one-year expectations from other sources are around the upper bound of the target range. Expectations from the capital market for the second year and onward are within the target range.
Economic activity in Israel remains strong. The labor market remains tight, and the GDP level remains higher than the long-term trend. However, the Bank of Israel said that monetary policy tightening and moderation of activity abroad are expected to lead to some slowdown in economic activity in Israel as well, and a number of indicators are showing signs of the beginning of such a process.
Home prices in Israel increased in the past 12 months by a rate significantly higher than the pace of recent years. However, the number of home purchases continues to decline, and the volume of new mortgages taken out in recent months declined significantly.
The BOS said that since its previous monetary policy decision, the shekel strengthened by 3 percent against the US dollar, and by 0.7 percent in terms of the nominal effective exchange rate. In contrast, the shekel weakened by 2.8 percent against the euro.
Economic activity abroad is moderating, and the risk of a recession is increasing, mainly in Europe, in view of the continuing war in Ukraine and the energy crisis in Europe, high inflation and monetary tightening, and the slowdown in China. In contrast, the easing in the supply chains is continuing, with a decline in shipping costs.
In short, the Bank of Israel said that the Israeli economy is recording strong economic activity, accompanied by a tight labor market and an increase in the inflation environment. The Committee has therefore decided to continue the process of increasing the interest rate. The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.
