Rate hike poses dilemma for Bank of Israel

• Author: Hezi Sternlicht
• Published date: 02 October 2022
• Publication title: Globes (Rishon LeZion, Israel)

The question is not if the Bank of Israel will hike the interest rate tomorrow but by how much. The more conservative estimates see the Bank of Israel hiking the rate by 0.5% but following the latest negative developments in the world economy many analysts have told "Globes" that they believe the Bank of Israel will again raise the rate by 0.75%. "It is indeed a dilemma," says Leader Capital Markets chief economist Yonatan Katz. "The August Consumer Price Index was lower than expected, so there are some signs of moderation in economic activity." Katz stresses that this is a factor that may lead to a more moderate interest rate increase by the Bank of Israel

But Katz adds, "On the other hand, it should be remembered that in all four previous decisions, the Bank of Israel surprised and raised the interest rate upwards at the higher level of the forecasts. The Monetary Committee decisions were also unanimous, so it seems that this is a hawkish committee, which is very much influenced by the policy of the US Federal Reserve and the central banks in general."

The Bank of Israel interest rate is currently 2%, while only in February of this year it was only 0.1%. In all four of the last decisions, the Bank of Israel raised the interest rate, and the hike of 0.75% in the last decision in August was the sharpest that the Bank of Israel has made in 20 years.

Rampant inflation worldwide has led the US Fed and other central banks to raise the interest rate to try and cool rising prices. If the Bank of Israel does not raise the interest rate fast enough, the shekel could plunge even further against the dollar, and inflation in Israel would increase even more due to more expensive import costs.

There is a real dilemma

As someone who worked at the Bank of Israel in the past, I sat on the committees there and absorbed the spirit of the discussions. I estimate that the Bank of Israel is most likely to raise the interest rate by 0.75%," says Ofer Klein, Head of the Economics and Research Department at the Harel Insurance and Finance Group. "There is a real dilemma over whether to raise the interest rate by 0.5%, so that the interest rate will rise over a longer period of time, or to carry out the hikes in larger installments over a shorter period. I estimate that the Bank of Israel will go for the second option of sharp and rapid increases."

Why

"Because there really is inflation in Israel. I estimate that within a year, inflation in Israel will converge again to the Bank...