Bank of Israel Considers Further Interest Rate Hike

The Bank of Israel Monetary Committee is scheduled to convene next Monday for a decision on whether to implement another interest rate hike. According to the Bank of Israel’s research department, there is an anticipation of an additional 0.25% increase this year, resulting in an interest rate of 5% by the end of 2023, marking the highest level since 2007.

Israel’s inflation rate is currently following a downward trend at 3.3%, comparable to the situation in the U.S. The country also experiences a tight job market with notably low unemployment, akin to the levels seen in 2019 just prior to the COVID pandemic. These conditions are contributing factors to the upward pressure on inflation.

Additionally, the shekel, Israel’s currency, experienced a significant weakening last week, surpassing the NIS 3.80/$ threshold for the first time since March 2020. The depreciation of the shekel leads to higher prices for imported goods.

Mizrahi Tefahot Bank’s Chief Economist, Ronen Menachem, emphasized the intensified volatility of the shekel, which has depreciated by 4% since the start of August. Menachem highlighted, “The shekel’s substantial devaluation against the dollar, exceeding the Bank of Israel’s defined threshold, is estimated to be at least 10%. Thus, the currency is contributing to inflationary pressures.”

Menachem cautioned, “The unique economic repercussions of the legal and security situation necessitate careful consideration from the Bank of Israel. The upcoming month holds significant legal developments that could notably increase shekel volatility.”

Ori Greenfeld, Chief Economist and Strategist at Psagot, remarked, “In Israel, the impact of the interest rate hikes is expected to be particularly pronounced in the upcoming months.” He opined that the Bank of Israel will likely adopt similar rhetoric only after the U.S. Federal Reserve responds and adjusts its own policies.