Following the Bank of Israel’s decision not to raise its key interest rate on Monday, there is a question as to whether or not any government bodies are working to mitigate the country’s inflation. While that responsibility typically falls to both parties, some experts fear that the current government is too preoccupied with pursuing its highly-criticized judicial reform plan to adequately address Israel’s legitimate inflation problem.
“In a properly functioning country, both fiscal policy (determined by the elected government) and monetary policy (determined by the independent central bank) are used to fight inflation. In today’s Israel, the government’s attempts at a judicial coup have actually fed inflation concerns rather than addressing them, leaving the Bank of Israel as the sole responsible adult in the room,” said Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and an economist at Tel-Aviv University.
Ben-David pointed out that, since Israel’s new government was established six and a half months ago, stock markets in the US and the other G7 countries have risen substantially while the massive uncertainty caused by Israel’s government has led to a decline in the Israeli stock market, as individuals and companies withdraw money and move it abroad. This, in turn, has led to a devaluation of the shekel; according to Bank of Israel calculations, this devaluation is over 10% more than actual market conditions dictate and is wholly a result of the uncertain climate created by the government.
'Most fiscally irresponsible government in Israel’s history'
A problematic chain of events further unfolds, wherein the shekel’s devaluation results in more expensive imports, which in turns feeds into even higher inflation. This devaluation caused by the uncertainty alone has increased inflation by at least a full percentage point. “Under such circumstances, not only is the Bank of Israel left to deal with inflation without any help from elected officials, the most fiscally irresponsible government in Israel’s history is itself a key determinant underlying Israel’s rising prices,” Ben-David said.
With this being the case, the Bank of Israel has turned repeatedly to its seemingly most-favored tool: interest rate hikes. By increasing the interest rate, the bank hopes to reduce consumer spending, leading to regulation in the market and ultimately a decline in inflation. After 10 consecutive hikes over the course of several months, Monday’s decision to leave the rate as is (at least momentarily) is a sign that, despite the fact that it seems to be facing the issue alone, the bank’s insistence on raising its key interest rate has paid off, at least somewhat.
As Bank of Israel Governor Amir Yaron put it, “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,” though he warned that further instability caused by governmental legislation could smother the positive progress in its crib.
It remains to be seen whether or not the current state of Israel’s monetary policy will be enough to slowly reduce inflation, or if the government will continue to fan the flames that will ultimately require more action — but as of today it is painfully clear that the Bank of Israel will likely need to handle that problem on its own.