Bank of Israel (BOI) Deputy Governor Andrew Abir said that Israel needed to raise interest rates because of the falling Shekel. The Monetary Committee of the BOI Monday announced its decision to increase the interest rate by 0.25 percentage points to 4.75 percent, marking the tenth consecutive time the BOI has raised the interest rate.
But in its announcement, the BOI said the move was needed because of continuing worldwide inflation.
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In an interview with Reuters, Abir said, “The progress that we would have expected on getting inflation back into the target has been slower predominantly because of (the shekel’s) exchange rate and creation of the political uncertainty that we’ve seen over the last few months.”
Abir linked Israel’s current political disputes to the nation’s financial woes, including the drop in the Shekel’s value. He went on to tell Reuters that he thinks the BOI probably needed to engage in greater monetary policy tightening than it had envisaged because of the “political uncertainty leading to an increase in Israel’s risk premium, depreciation of the currency, and therefore inflation being higher.”
The BOI deputy governor expressed similar sentiments in an interview with Bloomberg saying the interest rates were, “the cost of the depreciation of the currency around the political uncertainty, increasing this premium for Israel around the judicial reforms.”
And he is not alone in this assessment. Many feel that the Shekel dropped considerably in value so far in 2023- it has lost 4% against the US Dollar since January 1 – 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.
Massive protests have rocked Israel over the past few months, ever since Justice Minister Yariv Levin revealed the government’s plans to alter the nature of Israel’s judicial system. The government’s judicial reform plan would greatly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. The opposition charges this would harm Israel’s democracy, eroding foreign confidence in the country and hurting its economy. And this is why the country is now on the brink of what some are describing as the biggest societal clash in Israel’s history.
