The Bank of Israel will feel comfortable starting to raise interest rates in the last quarter of 2022, assuming that the US interest rate rises at least twice by this stage, leading economists said on Monday. The current interest rate is 0.1%.
“In 2021 inflation was 2.8% and a forecast that in 2022 inflation will be between 1.6% and 2.6%,” Roy Lexer, director of Nostro Mercantile Bank, said.
Situation in Israel:
- Growth - Growth in 2021 is expected to amount to approximately 7%, and the Bank of Israel's forecasts for 2022 and 2023 are 5.5% and 5%, respectively. These are relatively high numbers that reflect higher growth than the long-term potential of the economy, so it is likely that we will see a slowdown in the growth rate in subsequent years. The labor market gradually improved during the year, when we saw a decrease in the general unemployment rate, an increase in the number of employed people and an increase in the participation rate. At the end of 2021, the unemployment rate dropped to 5.8% (the lowest level since the outbreak of the crisis), and in fact the economy is very close to full employment. The main assumption is that these processes will continue well into 2022, but the continued improvement in the labor market largely depends on the state of morbidity in Israel and the level of restrictions that will be imposed as a result.
A new corona wave will make the government impose substantial restrictions on the economy, will slow down the recovery and may even put us back.Inflation - In 2021, inflation amounted to 2.8%, with all items in the index recording price increases except clothing and footwear items (about 3% of the index). Given the high level of uncertainty regarding economic and health developments in Israel and around the world, it is not surprising that the range of forecasts for 2022 is wide, ranging from 1.6% to 2.6%. One of the significant items in the index is housing (rent), which rose by about 3% this year. Since apartment prices (which are not included in the index) have risen by about 10% this year, there is a real concern that we will also see a sharper increase in rental prices during 2022, which will drag the entire index upwards. The inflation story is not a local story, but a global one. It is important to know that despite the rise in inflation, it is still a low level compared to many countries in the world, when the appreciation of the shekel was a significant contribution to the issue.
- Interest rate - The current interest rate in the economy is 0.1%, and in fact the Bank of Israel's interest rate has been near zero (0.1% or 0.25%) since the end of 2014. Many economists estimate that the Bank of Israel will feel comfortable starting to raise interest rates in the last quarter of 2022.
In the light of the rise in the inflation environment, there have recently been voices in the economy estimating that interest rates will start to rise in the second quarter of this year.
In the context of changing monetary policy, since inflation in Israel is in the target range and does not pose a problem for the economy, it will probably not want to harm the economic recovery that is currently in question against the background of a renewed rise in morbidity around the world.