Steven Scheer and Ari Rabinovitch
JERUSALEM (Reuters) – Israel’s central bank raised its benchmark interest rate on Monday. half a basis point, and likely in the coming months, saying it seeks to curb inflation above 5%.
The central bank raised its key interest rate to a year high of 3.14% from 3 as scheduled .25%. Policy makers began raising rates from 0.1% in April and took aggressive steps in the frontloading process, but most analysts believe the tightening cycle is coming to an end.
Bank of Israel Governor Amir Yaron said monetary policy was already “restrictive” but expressed concerns about inflation, even though it was lower than much of the West. The labor market is tight and the new government will spend huge sums to meet the coalition deal.
While the central bank’s own economists expect the key rate to be at 4% a year from now – meaning there will be just another 25 basis point hike – Yaron can’t commit to hitting that peak.
He told reporters that the pace of interest rate hikes will continue to depend on data. “We would not hesitate to raise rates further,” Aaron said, adding that he expected inflation to start to slow in the second quarter. “I think headline interest rates will have to stay high.”
Israel’s annual inflation rises to despite rate hike – November’s annual high of 5.3 percent was up from 5.1 percent in October – well above the government’s annual target range of 1 percent to 3 percent and fueling public anger over soaring living costs.
Central bank staff see inflation at 3% p.a., easing to 2% in 2024.
“We are determined to bring inflation down and bring it back within target range,” Yaron said.
The new government that took office this week, led by Benjamin Netanyahu, has massive budget demands from its coalition partners. Yaron cautioned against ballooning deficits and debt loads.
“It is important that the new government takes the necessary responsibilities in terms of fiscal policy” and public sector wage agreements, he said. “It is important to remember that the Israeli economy cannot take for granted the high priority given to rating entities and international financial institutions.” Growth in the third quarter was 1.9 percent from the second quarter, down from 7.4 percent in the previous three months.
is expected to grow by 2.8% in 2024, downgraded from 3% to 3.5% in 2024 according to the Bank of Israel’s latest forecast.