Bank of Israel Building Jerusalem (Wikipedia)
The Monetary Committee of the Bank of Israel (BOI) raised the interest rate Monday by 0.5 percentage points to 3.75%. The main reason for the new raise in rates was the continuing problems with inflation.
Governor of the Bank of Israel Prof. Amir Yaron commented on the decision explaining that high inflation involves growing uncertainty and increasing difficulty in making decisions at the household and the business levels, weighs on economic conduct, and adversely impacts growth and welfare, first and foremost amongst the weaker strata.
Inflation in Israel is 5.3% over the past 12 months and is high in a wide range of CPI components. However, there has been some moderation in some components. The BOI said Inflation expectations for all ranges are within the target range.
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“The more entrenched inflation becomes, the harder it is to eradicate,” said Governor Yaron, “and then ultimately the required interest rate will be even higher. We in the Monetary Committee are determined to reduce the inflation rate and to return it to within the target range. This is in order to ensure price stability, which is necessary for economic stability and a growth-supporting environment.”
The BOI also explained that since the previous raise in interest rates, the Shekel weakened by 1.6% against the US dollar, by 5.8% against the Euro, and by 3.4% in terms of the nominal effective exchange rate.
Yaron added that it is important that the new government “acts with the necessary responsibility with regard to fiscal policy, in particular regarding new expenditures that are not geared towards promoting sustainable growth.”
He also said that the Israeli economy “cannot take for granted the high regard from the rating entities and international financial institutions with which I am in constant contact.”
“As a small and open economy,” Yaron added, “that interacts with the largest economies in the world, the continued trust of the markets and of the various entities in the global economy is very important to the Israeli economy and to the existence of a financial and business environment that is stable and secure.”
The Bank of Israel added 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.
