Bank of Israel raised interest rate by 0.5% to 1.25% to try and Curb the inflation rate

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by Ifi Reporter Category:Financial Jul 4, 2022

The Bank of Israel has raised the interest rate the sharpest way in 11 years at a rate of 0.5 percent so that the interest rate in the economy rises from 0.75% today to 1.25%.
According to a survey by the economic information company Bloomberg, 15 out of 17 economists from financial institutions in Israel and abroad thought that the Bank of Israel would take an aggressive step to curb inflation and raise interest rates by 0.5 percentage points. The interest rate increase is expected against the background of inflation, which accelerated to 4.1% in May.

The last time the Bank of Israel raised the interest rate by 0.5 percentage points was in April 2011. Either way, this will be the Bank of Israel's third interest rate hike in recent months, after the interest rate was raised in April 2022 from 0.1% to 0.35%, and in May from 0.35 % To 0.75%. The last time the Bank of Israel raised interest rates in three consecutive interest rate decisions was also in the spring of 2011.
The inflation environment in 2011 was similar to what the Israeli economy is experiencing today - rising prices at an annual rate of more than 4%. Then, more than a decade ago, the Bank of Israel raised the interest rate to 3.25% in response. Today, the Bank of Israel is still far from this interest rate level, and according to most forecasts, inflation is expected to moderate, and accordingly the interest rate will reach 2.5% in a year's time.
The announcement of the interest rate hike today was accompanied by a press conference by the Governor of the Bank of Israel, Prof. Amir Yaron, a reassessment of the Bank of Israel's Research Division and the publication of a new macroeconomic forecast. The Bank of Israel hinted that as part of the update of the forecast, a reduction in the economy's growth forecast will be made. So far, the Bank of Israel has estimated that growth in Israel in 2022 will reach 5.5%, while in 2023 it will reach 4%. However, the sharp rise in interest rates, which is expected to slow the wheels of the economy to stabilize prices, may affect the forecast and moderate the growth estimate in the coming years.
Concerns about an economic slowdown and even a recession have intensified in recent days in the US and Europe, partly due to deteriorating economic data and the publication of higher-than-expected inflation figures in the US and Europe - which will force central banks to act more significantly and raise interest rates.
Despite the pessimistic predictions of a global slowdown, there are those who believe that at least at this stage Israel is succeeding in avoiding it. Victor Behar, director of the economic department at Bank Hapoalim, believes that "while in the world economic data is beginning to justify the fear of a recession, in Israel it has not yet manifested itself. Credit card sales, for example, grew 6.1% in March-May, "Double that. The industry sector data is also good - industrial production rose in February-April at an annual rate of about 15%, and working hours rose at a high rate of 6.3%, which indicates a lack of working hands."
"Israel is probably not immune to the current slowdown in the world, but there are several factors that are moderating and delaying the negative effects of the world. First, inflation here is lower due to relative stability in electricity prices. Second, the construction industry is at peak activity, with more than 70,000 starts "Construction that is expected this year. Even if we see a slowdown in the purchase of new apartments later this year, these are projects that have already been implemented."
Alex Zabrzynski, Meitav's chief economist, also believes that "in the meantime, the Israeli economy continues to expand without significant signs of slowdown. The slowdown in Israel is expected to be felt in the second half of the year."
According to Zabrzynski, the Bank of Israel is expected to raise interest rates by 0.5% this week: "The inflation rate continued to rise with a broad spread of goods and services. The economic data in the economy continue to be positive. Sharp in the world and its impact on Israel. "
The members of the Monetary Committee of the Bank of Israel, like the other central banks in the world, are now forced to walk a very thin rope - and a gaping chasm awaits them on both sides. Each step should be carefully considered, but on the other hand they must not linger on the rope.
On the one hand, hesitation in raising interest rates, or raising it too slowly, may exacerbate price increases and lead to inflationary dizziness. In such a situation, inflation may slowly penetrate all areas of services and goods, and workers - affected by rising prices - will demand higher wages, and thus inputs and prices will continue to rise.
On the other side of the rope, an equally deep chasm awaits the Bank of Israel - fear of a recession in the Israeli economy. The exit from the corona crisis has not yet been completed, and the economy is still operating under conditions of uncertainty. In such a situation, a sharp rise in interest rates could stifle credit in the economy, cut consumption, and hurt economic growth - and perhaps even cause a recession.
In addition, the downturns in the financial markets, and certainly in the high-tech sector, may also permeate real activity. The layoffs in high-tech and perhaps even corporate losses may drag the Israeli economy down.
Currently, in light of the relatively restrained inflation in Israel so far along with a high growth rate in 2021, the Bank of Israel can make decisions under slightly less pressure for fear of a recession - and may therefore act more aggressively to stabilize prices. "The Bank of Israel enjoys sufficient degrees of freedom to raise the interest rate by 0.5 percentage points in the forthcoming decision," says Dr. Gil Befman, chief economist at Bank Leumi.

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