Bank of Israel Raises Interest Rate for First Time Since 2018

The Bank of Israel’s monetary committee raised the country’s interest rate on Monday for the first time in three years, in a late attempt to head off rising inflation.

While a rate increase was widely expected, the central
bank surprised analysts by hiking the representative rate to 0.35 percent, instead of 0.25 percent as many had believed it would do.

The bank forecasts inflation of 3.1 percent over the next 12
months, and 3.6 percent for the year 2022, which is above the bank’s price stability window of 1-3 percent a year. Inflation is forecasted to drop to 2 percent for 2023.

The bank forecasts that its own representative interest
rate will be 1.5 percent in a year, a figure that matches capital market forecasts.

The central bank forecasts GDP growth of 5.5 percent for 2022,
and 4 percent for 2023.

“The Israeli economy is strong and has nearly entirely erased the impact of the coronavirus pandemic,” said Bank of Israel Governor Amir Yaron at a press conference announcing the rate increase.

"The GDP gap closed, the labor market has nearly entirely rebounded, and the employment rate is high alongside demand for workers,” he said.

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“For part of the population, available income has
increased as has demand. Initially this was thought to be temporary but this turned out not to be the case,” he noted. “This has led to unusually high inflation in many countries. In Israel inflation is significantly lower than in many OECD nations,” he said.

Israel has relatively limited trade with Ukraine, and as
a result has not suffered from inflation as a result of the war as much as some other countries, he noted. The strengthening shekel has also helped dampen inflation, he noted.