The Monetary Committee of the Bank of Israel has raised the interest rate by 0.5 percentage points to 4.25 percent. The reason, of course, is the continuing problem of inflation. While Israel has posted lower inflation rates than either the US or the EU, it is still seeing a rate well above 5% and this is not good for any economy.
In explaining its decision the Bank of Israel cited the fact that inflation over the preceding 12 months in Israel was above the upper bound of the target, overshot for a “wide range of components,” and is 5.4 percent.
But, noted the Bank, inflation expectations for all terms are within the target range.
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In addition, the Bank of Israel reported that in Israel GDP grew in 2022 by an accelerated rate of 6.5 percent, and for the last 5 quarters its level has been above the pre-Covid crisis trend line. GDP growth in the fourth quarter was impacted, to a large extent, by a transitory sharp increase in vehicle purchases at the end of 2022, explained the Bank.
Also, economic activity continues to be robust in Israel. The labor market remains tight and is around full employment, but in recent months there has been some moderation in various employment data.
The Bank of Israel added that the scope of housing market activity is moderating. Home prices continued to increase in Israel, but for several months already at a more moderate pace. The number of home purchase transactions and the volume of mortgages taken out continue to decline. Rents continued their upward trend.
The Bank of Israel stated, “Since the previous policy decision, exchange rates have been characterized by considerable volatility—in the beginning of the intermeeting period the shekel strengthened, and later on the trend changed and the shekel depreciated by approximately 5 percent in the last month.”
“Growth forecasts worldwide,” added the Bank, “were revised upward, but the growth rate in major economies continues to be moderate. The inflation environment continues to be high, but it can be seen that there is moderation in the headline inflation rate in many countries, but the moderation in core inflation is slower.”
The Bank of Israel also stated, “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.”