Israel’s interest rates are high enough to bolster the shekel and ensure inflation slows to 3% or less by early next year, according to the country’s central bank governor.
(Bloomberg) — Israel’s interest rates are high enough to bolster the shekel and ensure inflation slows to 3% or less by early next year, according to the country’s central bank governor.
“We believe the current rate is in restrictive territory,” Amir Yaron told Bloomberg Television from Jerusalem.
He spoke a day after the Bank of Israel kept its benchmark rate unchanged at 4.75%, even with the shekel having recently depreciated to a three-year low.
The currency weakened 0.2% to 3.79 per dollar as of 2:10 p.m. local time. That’s extended its loss this year to 7.3%, one of the worst performances in a basket of more than 30 major units tracked by Bloomberg.
Israeli assets have been rocked by political unrest in the country. The government’s plans to weaken the power of judges have triggered mass protests and even criticism from Yaron.
The shekel has become “detached from developments in financial markets abroad due to uncertainty brought on by judicial changes,” Yaron said.
Still, he ruled out the central bank intervening by selling down its foreign reserves. Markets should “determine that risk premium,” he said.
Asked whether capital is moving out of Israel in light of the political ructions, Yaron said any such flows are yet to have a “macro effect.”
“Clearly, the uncertainty that is brought about makes investors inside and outside Israel judge things a lot more carefully,” he said.
The governor, whose term ends in December, declined to say if he will seek a second one. There’s been plenty of speculation in Israeli media he’ll step down. Prime Minister Benjamin Netanyahu, in an interview early last month, said he hadn’t decided if Yaron should stay on.
“I will take the holiday that is coming here within the next couple of weeks to figure out my next steps,” Yaron, previously a finance professor at Wharton business school, said on Tuesday.
“I am close to the end of my first term, almost five years, perhaps one of the most challenging terms in Israel,” he said, citing numerous elections, the coronavirus pandemic and Russia’s invasion of Ukraine.
The central bank’s aggressive tightening since early last year — which included a run of 10 straight hikes — have helped boost Israel’s real, or inflation-adjusted, rates from well below zero to above 1%. That should ensure inflation falls to within Israel’s target of 1% to 3% by the first quarter of next year, Yaron said.
Even so, the year-on-year inflation rate, now at at 3.3%, will probably rise to 4% “at the next reading” before it drops, Yaron said.
“We might need to continue to raise rates but right now” they’re at a level that “should bring us back into target without damaging economic activity more than needed,” he said.
–With assistance from Abeer Abu Omar and Sarah Halls.
(Updates with quotes from governor on capital flows.)
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