Bank of Israel Increases Interest Rate for Sixth Time this Year

On Monday, the central bank in Israel increased the benchmark interest rate for the sixth meeting in a row. It hikes the interest rate from 2.75% to 3.25% for taming the inflation in the country.

The interest rate announcement from the Bank of Israel said that there was strong economic activity, along with a rise in inflation and a tight labor market.

Monetary tightening

It all started in April of this year when the central bank had first begun monetary tightening. The interest rate had been 0.1%, which was an all-time low where it had been held for over a year during the COVID-19 pandemic.

Since April, the central bank has now increased the interest rate for the sixth time. In recent months, the pace of rate hikes has been accelerated by the Bank of Israel.

This is because it wants to bring inflation down to the government’s range of somewhere between 1% and 3%.

The last decision taken by the monetary committee of the central bank had been in early October when they had decided to increase the interest rate by 75 basis points, making it the second consecutive hike of the same amount.

CPI

In October, there had been a 0.6% rise in the Consumer Price Index (CPI), which is considered a measure of inflation tracking the price of household goods.

This pushed up annual inflation in the last 12 months from September’s rate of 4.6% to 5.1% in October. It was after inflation had hit 5.2% in July, which was the highest it had been in 14 years.

The reason for the price growth was because of increases in the cost of clothing, food, apartment maintenance and transportation.

In the statement issued about the interest rate hike, the central bank also warned about the higher risk of recession and the slowdown in economic activity globally.

This possibility is strengthening in Europe due to the Russia and Ukraine war, the slowdown in China, the monetary tightening, red-hot inflation and the European energy crisis.

Moderating inflation

The central bank stated that due to the moderation of economic activity abroad, along with the tightening in monetary policy, the economic activity in Israel will also slow down.

It said that there were already indicators hinting at this process. It also said that they can also moderate inflation with monetary policy tightening in the country.

This would help in moderating demand, ease the difficulties in the supply chain and also push down commodity prices.

Before the rate decision was announced, economists had been predicting that there would be another hike of 75 basis points in the interest rate.

This was considered likely due to a rise in apartment prices, along with higher inflation. But, the central bank opted for a more moderate increase of 50 basis points.

This was because they expect monetary tightening to also slowdown in both the US and Europe, as the risk of recession in 2023 is growing.