There were no surprises on Monday afternoon and the Bank of Israel (BOI) increased its key interest rate by half a percentage point. It believes that more raises are needed to keep inflation below 5% while the economy continues strong and the labour market remains tight. This latest action reinforces the bank’s hawkish stance to offset growing living costs.
Economists expected this decision to be one of the last in a string of dramatic monetary policy tightenings that began in April when the benchmark rate was nearly zero at 0.1%. However, as high inflation persisted, BOI had to act and start raising the interest rate which now stands at an 11-year high of 3.25%.
The BOI raised its interest rate forecast for the coming year from 2.75% to 3.5% at its last meeting on October 3. And, in his statement, Governor Amir Yaron revealed that “the inflationary climate is already controlled, but that it must continue at or above 3% in the future”.
Nonetheless, a month and a half later, the central bank remains concerned with price pressures and is inclined to bring inflation under control.
Therefore, the BOI opted for front loading interest rate rise since it would not want to find itself in a position similar to that in the US or Europe, where inflation has recently reached double digits
However, the process of front loading rate increases, according to BOI’s Deputy Governor Andrew Abir, was not finished.
In his interview to Reuters Abir said, “It’s pretty likely that we will need to raise interest rates higher than what the research department had in October forecast, we don’t see this as the end of the process.
Abir further added, “There will be pain now but it’s better to take that pain right at the beginning rather than let inflation get out of control and rates can get to 6-7%”.
The markets now expect the benchmark interest rate to hit 4% in the first quarter of 2023.