It would be extremely surprising if the Bank of Israel did not raise interest rates tomorrow, for the first time since 2018. Israel’s strong economic performance and inflation above the target range for two consecutive months leave little choice to the central bank. .
Israel’s GDP grew by 8.2% last year, and in the last quarter its growth rate was the highest in the West. The labor market quickly improved and returned to where it was before the coronavirus pandemic, contrary to OECD forecasts that the Israeli labor market would be the last to recover. Rising property prices seem unstoppable and, more importantly, Israel’s inflation rate is overshooting the target.
So far, the Bank of Israel has stuck to its view that inflation in Israel is low compared to the rest of the world. This is still the case: in February, inflation in Israel was running at an annual rate of 3.5%, compared to 7.9% in the United States and 7.7% in the euro bloc. But a slowdown in global price increases is not on the horizon, with commodity prices soaring due to the war in Ukraine, and in Israel, the inflation rate is expected to soon exceed 4%.
The capital market is pricing in an aggressive interest rate hike of 0.5%, but the Bank of Israel is unlikely to take such a drastic step tomorrow, one that would damage its credibility. In an interview with “Globes” in early February, Bank of Israel Deputy Governor Andrew Abir said that if inflation rose above the target range, the bank would be in no rush to raise its interest rate. interest, but since then the global economic picture has changed.
A rise in interest rates will make money more expensive, increase monthly mortgage repayments, retard economic activity and cause unemployment to rise, which is currently at a low of 3.2%, a rate that compares to 3.5% before the coronavirus pandemic. A tight labor market is putting upward pressure on wages and, as far as the Bank of Israel is concerned, it is supporting higher interest rates. The question here, as in the United States and the rest of the world, is whether the fight against inflation will succeed at the cost of slowing economic activity.
Market analysts see the Bank of Israel raising its rate in each of its scheduled interest rate announcements this year. In the United States, the Federal Reserve has already hiked rates and is expected to accelerate the pace of interest rate hikes over the rest of the year to contain inflation, which is approaching 8% per year. However, the US capital market is anticipating an economic slowdown that will force the Federal Reserve to moderate the pace of interest rate hikes or even cut rates. At present, the Federal Reserve is ignoring these signals from the bond market.
Unemployment in Israel continues to fall
Israel’s economy grew by 8.1% in 2021
Israel’s February CPI is higher than expected
The bottom line is that an interest rate hike by the Bank of Israel tomorrow seems inevitable. Any other announcement will be quite surprising.
Published by Globes, Israel business news – en.globes.co.il – on April 10, 2022.
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