Bank of Israel Increases Interest Rates for the First Time since 2018

On Monday, the monetary policy committee of the Bank of Israel, announced that they were increasing the benchmark interest rate from 0.1% to 3.5%. The bank had already signaled that it would make such a move because it was interested in limiting housing prices and inflation in the country. This makes it the first time that the Bank of Israel has decided to hike up interest rates in Israel since November 2018. Back in February, the central bank had hinted that it would gradually begin increasing interest rates. At the time, the bank had said that economic performance had been quite strong, despite the COVID-19 pandemic and there were continued signs of strong activity.

The bank had also talked about the interest rate in Israel, which had surpassed the target range since early January, when they had had their last policy meeting. Likewise, there had also been a rise in housing prices as well as consumer prices. In February, Israel’s inflation rate had hit 3.5%, which was a tad higher than the range of 3% that the bank had set. During this year, the inflation rate is expected to reach 3.6%, while 2023 predictions show that it will reduce to 2%. The bank’s estimates indicated that the inflation rate would decline to about 1.5% in a year.

But, the bank also added that even though inflation was rising in Israel, it was still significantly lower than what other countries were experiencing. According to the bank’s statement, the increasing morbidity in China due to the coronavirus and the Ukraine-Russia war has disrupted the global supply chains. This has led to higher inflation and slowed down the global financial system. However, the economy in Israel appears to be experiencing ‘strong financial activity’, which has prompted the bank to increase the interest rate.

Amir Yaron, the Governor of the Bank of Israel, stated on Monday that Israel has a strong economy and has almost managed to overcome the pandemic’s impact. He added that they had closed the gap in GDP and the job market had also made a recovery. There was a high demand for workers and the employment rate has also gone up. This rapid growth indicates that Israel has a dynamic economy and can contain changes. According to the bank, they would determine the continued change in the interest rate by changing inflation rates and live data, so they can accomplish their goals and decrease inflation.

Yaron stated that the main responsibility of the central bank was to maintain price stability, but said that the cost of living has to be taken into account as well, which is not the same as inflation. He said that this issue was an important one for the people in Israel, as it could be seen in housing prices and consumerism. He said that it was important to introduce reforms for addressing this issue. When the COVID-19 pandemic had first hit Israel, the central bank had decided to reduce the interest rate to 0.1% from 0.25% and it had remained there until now.