August 18, 2022

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Bank of Israel Raises Interest Rate to Curb Inflation

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On Tuesday, the Bank of Israel hiked its interest rate by 50 basis points, which brought it to 1.25%. This hike came amidst the country’s efforts to combat the surging inflation and housing costs that are causing trouble.

Interest rate hike

It has only been a few months that the Bank had increased its interest rate to 0.75% from 0.35%, which had been a higher hike than expected. Experts now expect the interest rate to reach 2%. The hike will mean that mortgage payments on adjustable rates will now rise. This is in addition to the rising housing prices that have increased more than 15% in the last year, which is the biggest increase in more than a decade.

The Bank of Israel had first increased the interest rate in April to 0.35% from an all-time low of 0.1%. The interest rate had been kept low during the coronavirus pandemic. It had been the first increase by the bank since November 2018.

The central bank had indicated in February that gradual increase in interest rates would come in order to curb inflation. It had cited the strong performance of the Israeli economy and indicators highlighting strong activity. This was despite a rising energy crisis that had been brought on due to the Russia and Ukraine war and reduced Chinese economic activity because of COVID-19 curbs. Plus, the global supply chain had also been disrupted.

Impact of the hike

The purpose of hiking the interest rates is to limit the flow of money, as borrowing loses its attraction. This eventually has an impact on consumer demand and reduces inflation, which occurs because of excess cash and undersupply of goods.

The Israeli central bank said that inflation in the country had hit 4.1% in the last 12 months, with estimates indicating a rise to 4.5% in 2022. It is expected to come down next year to 2.4%. However, the bank was quick to note that inflation was significantly higher in other developed economies.

Inflation data

The Consumer Price Index (CPI) saw an increase of 0.6% in May. It is considered a measure of inflation that takes into account the prices of household goods. While this was lower than expectations, prices have still gone up by 2.8% since the beginning of the year.

Amir Yaron, the Chief of the Bank of Israel, said that it is a very complex stage, as there are significant processes happening not just in the local economy, but globally as well. He stated that their goal is to bring inflation down to the target range, without letting it impact economic activity.

As far as the labor market is concerned, the bank stated that unemployment rates in the country had gone back to the levels before the pandemic. However, it added that there was a shortage of workers that was affecting business operations in numerous industries. This can also affect inflation. The central bank also confirmed that home prices had risen significantly, but added that there were indicators of them wearing off.

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