Bank of Israel to hike rates by 1/2 pct point to get on top of inflation – Reuters.com

Posted By on June 30, 2022

The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun

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JERUSALEM, June 30 (Reuters) - The Bank of Israel is expected to raise short-term interest rates by half a percentage point next week to a nine-year high in a bid to keep inflation under control amid very low unemployment and strong economic growth.

Of 15 economists polled by Reuters, 14 forecast that the central bank's monetary policy committee (MPC) will raise the benchmark rate (ILINR=ECI) to 1.25% -- its highest level since September 2013 -- from 0.75% in what would be its third straight hike. One other anticipated a 0.25 point increase to 1.0%.

The bank will announce its decision on Monday at 4 p.m. (1300 GMT).

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A half-point increase would be the most aggressive policy move since a 3/4-point reduction in early 2009 during the global financial crisis. It would also match its strongest rate increase since late 2005 and keep up with U.S. rate increases.

The Bank of Israel "wants to make sure the market knows that they are willing to fight inflation hard -- to finish with it and take inflation expectations down," said Psagot Chief Economist Ori Greenfeld.

On the heels of global supply issues and rising wages due to a tight labour market, Israel's annual inflation reached an 11-year high of 4.1% in May, below expectations and far less than in other Western countries.

Economists believe inflation may climb near 5% -- well above the government's annual 1-3% target -- before moderating in 2023. Israel's economy grew 8.2% in 2021 and is expected to expand at least 5% in 2022 and 4% next year, while the jobless rate stands at 3.5%.

The central bank will issue updated macro estimates on Monday.

Analysts also cite recent large rate hikes by the U.S. Federal Reserve and other central banks as pushing Israeli policymakers into a half-point move rather than a quarter-point one. They expect further rate hikes at subsequent meetings to bring the key rate to about 2.5% by the end of the year.

Citi economist Michel Nies said expectations for aggressive hikes stem from the central bank choosing "hawkish" options for the prior two decisions -- raising rates by a quarter percentage-point in April when the market expected 15 basis points and 40 basis points in May versus expectations of a quarter percentage-point.

"This suggests that the Bank of Israel sees the fact that Israel has lower inflation than other economies as an opportunity to get ahead of the curve rather than as an argument for a slower pace of tightening," he said.

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Reporting by Steven Scheer; Editing by Hugh Lawson

Our Standards: The Thomson Reuters Trust Principles.

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Bank of Israel to hike rates by 1/2 pct point to get on top of inflation - Reuters.com

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