Bank of Israel/ Wikipedia
The Monetary Committee of the Bank of Israel (BOI) on Monday decided to increase the interest rate by 0.25 percentage points to 4.75 percent. This marks the tenth consecutive time the BOI has raised the interest rate. The last time it did so was just a little over one month ago when, in April, it also raised the rate by 0.25 percentage points. The reason for all of these raises is simple – inflation.
Inflation is not just a problem for Israel, however. There is a worldwide financial crisis and since the start of the war in Ukraine, the price of oil has gone up. Such an increase always causes inflation on some level. There have also been supply chain disruptions. There was an expected spike in inflation as the world exited the Covid crisis because the supply chains could not meet the new spikes in demand. But this should have eased by now.
In explaining the decision to raise the rate, the BOI pointed out that inflation in Israel over the past 12 months remained above the upper bound of the target range, at 5 percent, and was high in a wide range of CPI components. Looking at the past 6 months, and even more so over the past 3 months, the pace of inflation was lower than the year-on-year inflation.
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Inflation expectations and forecasts, said the bank, for the first year from all sources are around the upper bound of the target range. Expectations derived from the capital market for the second year onward are all within the target range.
Economic activity in Israel remains strong, but some economic indicators point to a moderation in activity. GDP grew by 2.5 percent in annual terms in the first quarter, a relatively high pace once the temporary effects of changes in vehicle taxation are omitted. The labor market remains tight, and in a full employment environment, but the job vacancy rate is in a downward trend.
In the housing market, the number of purchases and new mortgage volume continue to decline. Home prices remained unchanged in April, following a slight decline in March. In contrast, the upward trend in rents continued, and the housing services component of the CPI increased in the past year to 7.2 percent.
Since the previous monetary policy decision, the shekel weakened by 1.45 percent against the US dollar, by 0.7 percent against the euro, and by 0.8 percent in terms of the nominal effective exchange rate.
But if inflation is affecting the whole world, including Europe and the US, then why would the Shekel weaken against the Dollar and the Euro. Many feel that the Shekel dropped considerably in value so far in 2023 because of negative reactions among foreign investors to the controversial judicial reforms proposed by the government of Benjamin Netanyahu. These reforms have been characterized as undemocratic and have made many fear for Israel’s political stability.
This resulted in a large drop in local investments from abroad. So, the laws of supply and demand kicked in. Less foreign investment meant fewer Shekels were purchased with foreign currencies and so the Shekel depreciated.
The Monetary Committee said in the future the interest rate path will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.
