Israel raised interest rates to their highest level since 2008 and signaled they’ll remain elevated for some time, leading global central banks expected to extend a monetary tightening cycle to tackle faster inflation.
(Bloomberg) —
Israel raised interest rates to their highest level since 2008 and signaled they’ll remain elevated for some time, leading global central banks expected to extend a monetary tightening cycle to tackle faster inflation.
Adding to six increases last year, the Bank of Israel lifted its benchmark to 3.75% from 3.25%, in line with most forecasts. The monetary committee suggested it sees signs of a moderation in inflation pressures with an economic slowdown ahead, possibly an indication that it’s nearing the end of its cycle of rate increases.
Governor Amir Yaron said rates “will have to remain at a high level,” in a reiteration of previous policy statements. “We will not hesitate to raise the interest rate in the future, and we will not hesitate to act in a more moderate manner,” he said.
The decision marks the earliest start for a new year in global rate actions since 2009. It also prolongs Israel’s longest unbroken series of rate increases in decades, even as the central bank started to raise borrowing costs in smaller increments from November.
“That was a dovish hike,” Guy Beit-Or, chief economist at the Psagot Investment House Ltd., said in a note to clients shortly after the announcement. “We estimate that this interest-rate increase was probably also the last in the current cycle.”
Shifting Gears
Rate setters worldwide have debated how quickly to tighten policy as they weigh the impact on economic growth. Three of the most influential central banks dialed back their pace of rate hikes in December.
Speaking after the decision, Yaron described Israel’s monetary policy as already being “restrictive.” The governor, who serves as an economic adviser to the government, also warned of some of the dangers facing the economy as Benjamin Netanyahu’s new cabinet prepares to take office.
Israel hiked rates by more than 300 basis points in 2022 as officials raced to mitigate price increases. The shekel, which is closely correlated with the performance of US equities, lost nearly 12% last year against the dollar in its worst performance since 1998.
The Israeli currency traded 0.2% stronger as of 5:56 p.m. in Tel Aviv.
The monetary committee on Monday said that factors including a decline in oil prices and an easing of supply-chain disruptions could help reduce the pressure on inflation, “but with some lag and depending on developments in the exchange rate.”
Stoked by faster gains in the cost of housing, apartment maintenance and food, annual inflation reached 5.3% in November, the highest level since 2008. It’s above the government’s 1% to 3% target range that was breached a year ago.
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Alongside the rate decision, the central bank’s research team issued updated economic forecasts, seeing much weaker economic growth and slower inflation ahead.
It estimates Israel’s gross domestic product will expand 2.8% in 2023, down from 6.3% last year. Inflation in the coming four quarters is projected at 3%, with the central bank’s benchmark rate expected to average 4% in the final three months of this year.
Citigroup Inc. and Bank Hapoalim see the benchmark settling between 3.75% and 4%. Bank Leumi’s chief economist, Gil Bufman, predicted that a 25-basis-point hike was likely at the central bank’s next meeting in February.
The country recorded a falling debt-to-GDP ratio, while unemployment remained close to record lows during 2022. It’s also reportedly on track to record a budget surplus for the year, according to figures obtained by Globes.
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Netanyahu, who was sworn in as prime minister last week after just 18 months in opposition, has promised to tackle rising prices, but his new right-wing-religious coalition is expected to have a slightly looser fiscal policy than its predecessor.
The risk of a wider deficit prompted Yaron to call for more restraint.
“It is important that the new government acts with the necessary responsibility with regard to fiscal policy, in particular regarding new expenditures that are not geared toward promoting sustainable growth,” he said. “I have said in the past that one of Israel’s strategic assets is the low debt-to-GDP ratio of its economy.”
–With assistance from Harumi Ichikura and Zoe Schneeweiss.
(Updates with central bank comments starting in third paragraph.)
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