BOI Leaves Interest Rate Unchanged at 4.75% – BGovernor Yaron Expresses Concern on Proposed Judicial Reforms

Bank of Israel/ Wikipedia (Inset: BOI Governor Amir Yaron)

After months of repeated raises to the interest rate as part of its effort to counter global inflation, The Bank of Israel’s (BOI) Monetary Committee on Monday voted to leave the interest rate unchanged at 4.75%. The Bank said it chose not to raise rates yet again because inflation had stabilized in Israel for now.

But the BOI also warned of some troublesome data from the markets and its governor is clearly worried that the continuing domestic political turmoil in Israel could harm the economy.

The rate of inflation was always lower in the past year than in the U.S. or in Europe and still is. But the BOI is not ready to cut the interest rate just yet as it fears inflation has not been completely defeated.

Inflation over the past 12 months in Israel was 4.6%.

“Looking at the past 6 months,” said the BOI, “and even more so over the past 3 months, the pace of inflation is moderating in the prices of both tradable goods and non-tradable.”

One-year inflation expectations and forecasts are within the target range, near the upper bound. Expectations derived from the capital market for the second year onward are within the target range.

Governor of the Bank of Israel (BOI) Amir Yaron commented on the decision saying, “Since the second half of 2021, we have been in a process of tightening monetary policy, against the background of the major economic developments in the domestic and international environment. These led us in Israel, as with other central banks worldwide, to adopt a determined process of interest rate increases, which we began in April 2022.”

However, the Governor also said inflation has not been fully defeated warning, “We are in an environment of great uncertainty, and there are several upside risks to inflation pressures. Therefore, it is important to me to note that it is certainly possible that we will need to increase the interest rate going forward, if we see evidence that the inflation environment is not moderating at a suitable pace. We are determined to return inflation to its target and to ensure price stability in Israel.”

Economic activity in Israel remains strong, said the BOI, but a number of economic indicators point to some moderation in activity. The labor market remains tight, and in a full employment environment, but the downward trend in the job vacancy rate continues.

And Governor Yaron is concerned about how the judicial reforms proposed by the government of Prime Minister Benjamin Netanyahu might harm the economy should they pass.

“I have said several times in the past that due to the promotion of such reforms there was an increase in the level of uncertainty in Israel’s economy, reflected in, among other things, the excess depreciation of the shekel and the underperformance of Israel’s stock market,” he said.

“Continued uncertainty is liable to have notable economic costs, as reflected in the risks to the Research Department’s forecast, and some of which I noted earlier in my remarks. The IMF has also indicated, in its most recent report, the adverse impact from the continued uncertainty over time,” added Yaron. “Therefore, it is important to bring back the stability and certainty to the Israeli economy, and to verify that legislative changes will be carried out with broad agreement, and will maintain the strength and independence of the institutions.”

In this way, he echoed similar concerns raised by major financial firms around the world and credit ratings agencies like Standard and Poor’s. Many fear that the judicial reforms, which Israel’s political opposition charges will harm the country’s democracy because they will drastically reduce the authority of its Supreme Court to serve as a check on government powers. This is making foreign investors wary of possible future instability.

The Research Department revised its macroeconomic forecast. In its assessment, GDP will grow by 3 percent in each of 2023 and 2024, and some of the moderating effects of monetary restraint on activity will be realized later than in the April assessment. The main risk to the forecast is the materialization of a scenario in which the legislative and institutional changes with regard to the judicial system are accompanied by an increase in the country’s risk premium and continued depreciation of the shekel, an adverse impact to exports, and declines in domestic investments and in demand for private consumption.

Since the previous monetary policy decision, the shekel weakened by 1.8% against the US dollar, by 2.3% against the euro, and by 0.2% in terms of the nominal effective exchange rate.