Bank of Israel raises interest rate to 0.75 percent, higher than expected

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The Bank of Israel’s monetary committee raised its benchmark interest rate by 0.4 percentage points on Monday, bringing it to 0.75 percent, signaling that it intends to step up efforts to fight inflation. The increase was the second this year, after the bank raised the benchmark rate in April.

The relatively sharp increase was higher than forecast by economists, who had predicted that the rate would increase to 0.6 percent. The last time the benchmark interest rate reached the 0.75-percent mark was eight years ago, in July 2014.

According to the central bank, “the economy shows strong activity, with a tight labor market accompanied by rising inflation. The committee has therefore decided to continue with its gradual process of raising interest rates.”

This move will directly affect many households, increasing interest payments for people who took out variable-rate loans or mortgages, as well as making future loans and mortgages more expensive for individuals and businesses.

The current increase is in line with the central bank’s plan for normalizing the economy’s interest rates, namely returning to higher rates after more than a decade in which they were close to zero. This process began as a response to rising inflation, which reached 4 percent in April, a 10-year record. However, the economy’s growth figures for the year’s first quarter indicated a decrease by an annualized 1.6 percent.

The monetary committee stated that Israel’s economic activity continues “at a high level”, but that the war in Ukraine is increasing inflationary pressure, leading to a global slowdown in economic activity. The bank emphasized that the 4-percent inflation rate in Israel continues to be significantly lower than that in most developed countries, and that inflation expectations for the coming year are at the higher end of target values.

The central bank noted the first quarter’s figures indicating a shrinking economy, noting that this followed a 15.6-percent growth in the preceding quarter. “A comparison of the first quarter in 2022 and the first one in 2021 shows a 9 percent growth,” the committee said. “The level of national product remains close to the trend it was following before the crisis began.” It added that “the labor market remains tight and close to the full employment that characterized the pre-pandemic economy.”

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Regarding concerns of the impact of rising wages on inflation, the committee said this was not having a significant effect, so far. “Wages in the business sector, however, are higher than those in the pre-pandemic period, while increases in the public sector have been more moderate,” the committee said.

It also noted the rising price of real estate, noting that the extent of mortgages taken out in April was lower than in March, amounting to 500 million shekels ($150 million). “This is not a real change, given the seasonal aspects of April and its holidays,” it said. “However, the annual increase in rent costs (in renewable agreements) stands at 3.2 percent.”