Bank of Israel decides not to raise interest rate, for now

Bank of Israel governor: "We are still in an environment of great uncertainty."

 View of Bank of Israel main offices in Jerusalem, on January 2, 2023. (photo credit: YONATAN SINDEL/FLASH90)
View of Bank of Israel main offices in Jerusalem, on January 2, 2023.
(photo credit: YONATAN SINDEL/FLASH90)

The Bank of Israel on Monday decided not to raise its key interest rate this month, citing moderation in the country’s inflation as its primary reason to keep the rate at 4.75%.

“The monetary committee decided not to raise the interest rate, because in light of the available data, and the forecasts as of today, we estimate that the current interest level is at a sufficiently restraining level, which should support the decrease of inflation to its target,” Bank of Israel Governor Amir Yaron said.

According to the bank’s updated macroeconomic forecast, annual inflation is expected to stand at around 3% by the second quarter of 2024 and at 2.4% by the end of that year.

However, this estimate is potentially threatened by legislative changes that the government is currently pushing, such as the judicial reform and the recent efforts to force the banks to offer checking-account interest at a government-mandated rate.

“The main risk to the forecast is the realization of a scenario in which legal and institutional changes will be accompanied by an increase in the state’s risk premium, continued devaluation of the shekel, damage to exports, and a decrease in local investments and demand for private consumption,” Yaron said.

Bank of Israel (credit: Wikimedia Commons)
Bank of Israel (credit: Wikimedia Commons)

The bank’s decision on Monday does not rule out the possibility of further raising the rate at a later date if inflation does not moderate at a suitable pace, he said.

“The road to the convergence of inflation to the target is still long,” he added. “We are in an environment of great uncertainty, and there are several upside risks to inflationary pressures.”

One of the primary reasons behind the bank’s decision was an overall moderation in inflation, coupled with “a high level of activity” within Israel’s economy, Yaron said.

“Several indicators can be seen that point to the beginning of a moderating trend,” he said. “The rate of work vacancies is decreasing, the volume of mortgages has been decreasing in recent months, and the volume of credit for small and medium businesses has stabilized. All of these imply the beginning of a trend of restraining the economy, which results from the interest policy, which works to reduce inflation.”

One of the primary threats to inflation’s moderation is the current devaluation of the shekel. In the last six months, the shekel has undergone a significant devaluation, which conservative estimates indicate has so far contributed about 1% to 1.5% inflation.

“As the weakening of the shekel continues, this may cloud the return of inflation to the target, and therefore an even more restrictive monetary policy may be required,” Yaron said.

“It is important to restore stability and certainty to the Israeli economy, and to make sure that legislative changes are carried out with broad agreement, and that the strength and independence of the institutions will be preserved,” he added.