January 27, 2023

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Bank of Israel Chief Hints of More Rate Hikes after November

2 min read

On Monday, the Bank of Israel announced that it was raising the benchmark interest rate in the country for the sixth time this year.

Two days later, the Governor of the Bank of Israel, Amir Yaron hinted that the monetary tightening of the central bank may not be finished as yet.

This is in light of expectations that inflation will persist in the next few months.

Rate hike

The monetary committee of the central bank, which is headed by Yaron, announced on Monday that they were making a 50 basis points increase in the key lending rate.

This took it to 3.25% from 2.75%, as the bank is focused on dealing with the accelerated inflation. Before the decision was announcement, economists were divided between expectations of a hike of 50 basis points and 75 basis points.

Back in October, the central bank had hiked the interest rate by 75 basis points for the second time in a row.

Yaron attended the annual conference of the salary department of the Finance Ministry on Wednesday, where he said that the rate hike was a significant increase.

He also hinted that higher borrowing costs may be needed for taming inflation in the country.

Higher rates

The governor said that there was a strong possibility that they were not done with the rate hikes for now and that the rate could be higher than 3.5% in the first half of next year, which had been predicted by the central bank’s research division.

The Bank of Israel had first begun to increase interest rates back in April when it had been at an all-time low of 0.1%.

In recent months, it has picked up the pace of the hikes for bringing inflation within the government’s preferred range of 1% to 3%.

The chief cautioned that the last 12 months had seen price growth higher than the upper limit of their target range, as it has reached 5.1%, which is still lower than most developed countries.

Controlling inflation

Yaron asserted that the goal of the central bank was to bring inflation down to their target range. He stated that this was why they had increased the pace of the rate hikes in recent months.

He said that they expected consumer prices to remain high in the next two to three months, which means they have to consider the overall picture.

Economists noted on Monday that the move of the Bank of Israel to increase the interest rates by 50 basis points instead of 75 basis points was in accordance with other global central banks, including the US Fed.

These banks have also opted for a muted increase in the interest rates, as a slowdown in the global economy is expected.

While the central banks might slow down the pace of interest rate increases, they are unlikely to stop increasing them because a high inflation environment continues to exist.

Experts believe that the borrowing costs in Israel would reach 4% in the first half of next year.

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