After surprising investors in Israel in August and raising the interest rate by 0.75%, more than expected, the Bank of Israel’s Monetary Committee, headed by Governor Professor Amir Yaron, will announce tomorrow after -noon its decision on interest rates for October.
The question is not whether the Bank of Israel will raise the interest rate tomorrow but by how much. The most conservative estimates see the Bank of Israel raise the rate by 0.5%, but following the latest negative developments in the global economy, many analysts have told ‘Globes’ that they believe the Bank of Israel will Israel would increase the rate again by 0.75%. “It is indeed a dilemma,” says Leader Capital Markets chief economist Yonatan Katz. “The August consumer price index was lower than expected, so there are signs of moderating economic activity.” Katz points out that this is a factor that could lead to a more moderate increase in interest rates by the Bank of Israel.
But Katz adds: “On the other hand, it should be recalled that in the four previous decisions, the Bank of Israel surprised and raised the interest rate upwards to the highest level of the forecast. The decisions of the Committee Committee were also unanimous, so it appears to be a hawkish committee, heavily influenced by the policy of the US Federal Reserve and central banks in general.”
The Bank of Israel’s interest rate is currently 2%, while in February of this year alone it was only 0.1%. In the last four decisions, the Bank of Israel has raised the interest rate, and the 0.75% hike in the last decision in August was the biggest the Bank of Israel has made in 20 years .
Soaring inflation around the world has led the US Fed and other central banks to raise interest rates to try to rein in rising prices. If the Bank of Israel does not raise the interest rate fast enough, the shekel could plunge even further against the dollar, and inflation in Israel would rise even further due to higher import costs.
There is a real dilemma
As someone who worked at the Bank of Israel in the past, I sat on the committees there and absorbed the spirit of the discussions. I estimate that the Bank of Israel will probably raise the interest rate by 0.75%,” says Ofer Klein, head of the economics and research department at Harel Insurance and Finance Group. “There is a real dilemma whether to increase the rate interest rate by 0.5%, so that the interest rate will increase over a longer period of time, or to make the increases in larger increments over a longer period short. I believe that the Bank of Israel will opt for the second option of strong and rapid increases.”
Why
“Because there really is inflation in Israel. I estimate that within a year, inflation in Israel will again converge towards the Bank of Israel’s targets (1% to 3%). In Israel, a large part of the inflation is linked to the price of rents. They account for almost a quarter of the rise in the index. Beyond that, the Israeli labor market is tight. In other words, the rate unemployment rate is very low, and participation rates for 25-64 year olds are high Unemployment rates in Israel the economy is the weakest on record since David Ben-Gurion was Prime Minister All this is not linked to global fuel prices or the war in Russia.The way to deal with domestic inflation is to raise interest rates.
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How high will the Bank of Israel raise the rate?
According to Professor Asher Blas, former chief economist of the Bank of Israel and a lecturer at Ashkelon College, “interest rate hikes will continue until we are in the middle of the target range. inflation, when annual price increases are between 1% and 3%, preferably closer to 2%. He adds: “When expectations weaken for an extended period, and we are not there yet, then there will be an expected change in interest rate policy.”
In August 2022, the CPI increased by 4.6% over the previous 12 months, while in the United States the annual inflation rate was 8% and in some European countries where the energy crisis has hit hard hit, annual inflation rose to just above 10%. In Israel, for example, inflation is less than half the average Western rate.
Maybe the Bank of Israel has some breathing room to wait and not even raise the interest rate this time around?
Professor Blass rules out such a scenario. According to him, interest rate increases could lead to a strong strengthening of the dollar, which would make prices here even more expensive. According to him, “The dollar has already strengthened against all currencies in the world and against the shekel. We are already at an exchange rate above 3.5 NIS/$. If the Bank of Israel does not increase the rate, the shekel is expected to weaken even more, and then there is more chance that inflation will come via the exchange rate (imports). rates and other factors, it’s hard for me to see a situation where the governor of the Bank of Israel wouldn’t line up and raise the rate at all.”
“All central banks promote the same agenda”
The US dollar has strengthened by about 14% since the beginning of the against the shekel at over 3.56 NIS/$. A rapid depreciation of the Israeli currency against the dollar due to the interest rate differential has made products imported into Israel more expensive, especially food products and various raw materials including oil. Therefore, Klein believes that while the most correct process would have been to gradually increase the interest rate, the Bank of Israel was in fact forced to choose the “fast track” of large increases, which could harm the economy, due to the dictates of the global economy.
“It would have been okay to gradually raise interest rates over a longer period,” Klein says, “but all the major central banks in the world are promoting the same agenda: ‘Let’s strike quickly.’ We have seen countries like Sweden raise the rate by 1%, in a single decision. “Even in Canada, for example, they raised the interest rate by 1%. Even the EU, weakened by the war in Europe and energy prices, again raises the euro interest rate by 0.75% The United States raised the dollar rate by 0.75% for the third time. raised the interest rate by 0.75% So at the end of the day we are a small open economy, the interest rate is not really set by the Bank of Israel, but all over the world, depending on the conditions If they raised the shekel interest rate every time, say 0.25%, then the currency would crash.”
Published by Globes, Israel business news – en.globes.co.il – October 2, 2022.
© Copyright Globes Publisher Itonut (1983) Ltd., 2022.