Bank of Israel raises interest rate with highest markup in a decade

The move aims to combat soaring inflation.  

By World Israel News Staff

The Bank of Israel on Tuesday raised its interest rate by 0.5% to 1.25% — the biggest hike in over a decade –in a bid to temper rising inflation and soaring housing prices.

The hike is the third in as many months, beginning in April with a record low of 0.1%. It is expected to top 2.50% by the second quarter of 2023, according to BOI estimates.

“Home prices increased by 15.4% in the past 12 months, a significantly higher rate than in past years, but the sharp upward trend of annual price increases moderated slightly,” the Globes financial daily quoted BOI as saying.

The move will send adjustable-rate mortgage payments further up, on top of already-high housing prices that rose by about 15% over the past year, in the biggest rise in over a decade.

The last jump of half a point was in 2011.

Inflation in Israel over the past year hit 4.1 and is expected to rise to 4.5% for 2022. It will drop back to 2.4% which is within the annual target bracket of 1% to 3%, the central bank said.

Israel’s economy is expected to grow by 3.5% in 2023, lower than its 5% prediction made earlier this year.

2021 broke a twenty year record, with a GDP reaching 8.1% in 2021, the highest since 2000, when it stood at 8.4%.

The U.S. has a much higher rate of inflation at 8.6%, BOI noted. It added that the shekel has weakened by 5.1% against the U.S. dollar since last month’s rate adjustment.

“We are in a complex period in which significant processes are taking place, both in the local economy and in the global economy,” said Bank of Israel Chief Amir Yaron told reporters on Tuesday.

“Our main role is to work to bring inflation back to the target range, while maintaining as high a level of economic activity as possible,” he added in remarks carried by the Times of Israel.

“The labor market continues to be tight,” Yaron said, “especially in industries characterized by high demand for workers” — like the high-tech sector. These factors also have an impact on inflation, he said.

The bank warned that despite the Israeli economy’s continued growth, “the possible slowdown in global economic activity in view of the effects of the war in Ukraine and the slowdown in manufacturing activity in China, as well as the political uncertainty in Israel, may have a negative impact on economic activity.”

Yaron also warned of the cost on the economy resulting from the upcoming election.

But Yaron maintained that the economy is still “in a strong position in many respects. Growth is high, the labor market is tight, the government deficit is low, tax revenues are rising, and businesses continue to report an improvement.”

The Israeli economy has “demonstrated an impressive ability to grow and prosper in the short term, even in conditions of uncertainty,” he noted.

Bank of Israelhousinginflation