Bank of Israel raises interest rate by 0.75% to 2%

The last time the Bank of Israel moved by three-quarters of a point was a rate reduction in early 2009.

 The Bank of Israel building is seen in Jerusalem June 16, 2020. Picture taken June 16, 2020.  (photo credit: REUTERS/RONEN ZVULUN/FILE PHOTO)
The Bank of Israel building is seen in Jerusalem June 16, 2020. Picture taken June 16, 2020.
(photo credit: REUTERS/RONEN ZVULUN/FILE PHOTO)

The Bank of Israel raised its benchmark interest rate on Monday by three-quarters of a percentage point, its biggest hike in two decades, and appeared on track for further increases as it tries to rein in inflation that has topped 5%.

The central bank lifted its key rate to 2.0% from 1.25%, continuing a tightening cycle that began in April when policy-makers first raised the rate from 0.1%, an all-time low set at the outset of the COVID-19 pandemic.

The likelihood of a 75-basis-point hike increased last week when data showed Israel’s economy grew a robust 6.8% in the second quarter, while the annual inflation rate jumped to 5.2% in July, its highest level since October 2008.

The central bank’s policy-makers say they are determined to get inflation back within the government’s 1%-3% annual target.

The last time the Bank of Israel moved by three-quarters of a point was a rate reduction in early 2009. It last hiked rates by at least that amount in mid-2002.

 Bank of Israel Governor Amir Yaron gestures while he speaks during his interview with Reuters in Jerusalem June 16, 2020. Picture taken June 16, 2020. (credit: RONEN ZVULUN/REUTERS)
Bank of Israel Governor Amir Yaron gestures while he speaks during his interview with Reuters in Jerusalem June 16, 2020. Picture taken June 16, 2020. (credit: RONEN ZVULUN/REUTERS)

“The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment,” the Bank of Israel said in a statement. “The [monetary policy] committee has therefore decided to continue the process of increasing the interest rate.”

“The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment”

Bank of Israel statment

The bank’s own economists have said they expect the key rate to peak at 2.75% in the second quarter of 2023. One more decision is scheduled – on October 3 – before the November 1 general election.

Inflation in Israel is still far below Western levels, but with prices rising rapidly and anger growing among Israelis, the cost of living has become a main issue for candidates in the run-up to the election.

“We expect another increase of half a percentage point on October 3, which will also be impacted by central-bank decisions in the United States and euro zone to keep raising interest rates significantly in September,” said Ofer Klein, head of economics and research at Harel Insurance and Finance.

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The Manufacturers Association, however, called on the central bank to halt rate increases in the coming months to examine the effects of prior hikes on credit consumption in the economy.


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The shekel was largely flat at 3.28 per dollar after the rates decision.