December 5, 2022

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Bank of Israel Hikes Interest Rate to Control Inflation

2 min read

On Monday, the Bank of Israel hiked up its interest rate by another 0.75 points, which saw it go up to 2.75%.

This is part of the efforts of the central bank in recent months to bring down the growth of inflation in the country.

Inflation

The last 12 months have seen inflation in Israel climb to about 4.6%, which is lower than the 5.2% that had been calculated back in August.

However, it was still more than the upper range of 3% that had been projected by the bank back in January.

In August, the United States saw its inflation come down to 8.3%, while it had been 8.5% in the summer months. Europe, on the other hand, saw its inflation rise to 10% in September.

The rate hike from the Bank of Israel comes only a month after it had increased the interest rate to 2%, while it had been at 1.25% in July.

This marks the fifth time that the central bank has increased the interest rate this year, the first of which had happened in April.

At that time, the interest rate in Israel had been at an all-time low of just 0.1%. This rate had been maintained for several years and also during the pandemic.

Higher rates

The current interest rate in Israel is the highest it has been since January 2012. The purpose of increasing the interest rates is to restrict money flow.

It is accomplished by making borrowing less attractive due to the high interest, which reduces consumer demand eventually and eases the inflationary pressures caused by an oversupply of cash and undersupply of goods.

In July, the Consumer Price Index in Israel had risen by 1.1%, which had pushed up the annual inflation to 4%.

This is considered a measure of inflation that calculates the average cost of household items like clothing, food and transportation.

According to the Central Bureau of Statistics, this measure saw a 0.3% decline in the month of August. Nonetheless, inflation continues to be high in Israel.

As a matter of fact, it is the highest in more than a decade, along with a housing market that is red hot, as prices have risen by almost 17.9%, which is the fastest pace of increase in 10 years.

The Bank of Israel

On Monday, Amir Yaron, the chief of the Bank of Israel, said that the country’s economy appeared to be in a good place from a macroeconomic viewpoint, particularly as opposed to other advanced economies.

But, he also warned that inflation had increased all over the world and could also be seen in Israel, even though it was relatively on a smaller scale.

He added that it can have an adverse impact on the economy, especially in the case of weaker population groups, so they need to bring it back down within their target range.

While geopolitical issues like the Russia and Ukraine conflict, a global economic slowdown and supply chain disruptions have caused inflation, Israel also has some internal battles to fight.

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