• Wed. Nov 29th, 2023

Bank of Israel Hikes Interest Rates yet Again to Fight Inflation

Feb 21, 2023

On Monday, the Bank of Israel increased the interest rate for the eighth time in a row, as it delivered a hike of 50 basis points that took the lending rate to 4.25%.

This is the highest the interest rate has been since 2008, as the central bank has been battling a weakening shekel and rising pressure of inflation.

The hike

The monetary committee of the central bank decided to boost the interest rate from 3.75% to 4.25%, after there was a rise in inflation in January.

This came amongst strong economic growth, but rising uncertainty about the impact of the controversial judicial overhaul proposals, which has caused the shekel to weaken.

In February, the local currency has lost about 3% against the US dollar so far. The central bank said that economic activity is strong and the labor market is tight, which has resulted in inflation.

Therefore, the statement said that the Committee had decided to continue with their rate hiking cycle. There has been significant volatility in the exchange rate since the last meeting of the central bank.

The shekel had strengthened initially, but the last month saw the currency depreciate by 5%.

The change

Last April, the benchmark interest rate of the Bank of Israel had stood at 0.1%, which was a record low. The rate has now climbed to 4.25%, all for the purpose of controlling inflation.

This is because inflation is close to 5%, which is significantly higher than the central bank’s target range of 1% to 3%.

A weakening shekel means that imported goods become more expensive and this increases consumer prices, including that of gasoline.

The Bank of Israel said in the announcement that the inflation rate would be impacted by the rise in wages and the extent of fiscal expansion.

The response

Eli Cohen, the Foreign Minister, panned the decision of the bank to increase interest rates after the hike was announced.

He said that he had talked to Bezalel Smotrich, the Finance Minister, about meeting with the governor of the Bank of Israel to stop a rise in interest rates.

A member of the Likud party, he said that inflation was slowing down, so there was no reason to hike the interest rates anymore.

He added that this would mean more problems for Israelis who have mortgages to pay off. The chair of the Economic Affairs Committee, David Bitan, also criticized the decision.

He called on Amir Yaron, the Governor of the Bank of Israel, to halt interest rate increases, even if it means inflation will continue, because the public cannot deal with higher rates.

Bitan said that there was a rise in the cost of living and even if they manage to beat inflation, it would be at the expense of the Israeli citizens.

Smotrich favored the Israeli central bank later in his tweet, saving that its independence is vital for their innovative and strong economy.

However, he did acknowledge that the higher rates were making things difficult for many households.


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