The Bank of Israel announced Monday (July 4) that its monetary committee has decided to raise the current interest rate by 0.5 percentage points to 1.25 percent.
“The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment,” the Bank said in a statement.
“The Committee has therefore decided to continue the process of increasing the interest rate. The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.”
Inflation in Israel is above the upper bound of the target range, at 4.1 percent over the past 12 months. “With that, it remains significantly lower than in most advanced economies,” the Bank said.
Since the previous monetary policy decision, the shekel has weakened by 5.1 percent against the US dollar, by 2.9 percent against the euro, and by 3.6 percent in terms of the nominal effective exchange rate.
The Research Department revised its forecast. Its assessment is that GDP will grow by 5 percent in 2022 and by 3.5 percent in 2023. The inflation rate is expected to be 4.5 percent in 2022, and to decline to 2.4 percent in 2023.
One-year inflation expectations are above the upper bound of the target range. However, expectations for the second year derived from the capital market have returned to within the target range, and expectations from the third year onward have converged back to the midpoint of the range.
Economic activity in Israel is continuing at a high level and the labor market remains tight. However, 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, the Bank warned.
The labor market is in a full employment environment. Businesses in most industries continued to indicate a shortage of workers as a constraint on their current operations. The tight labor market is leading to some wage pressures in the business sector, the Bank said.
In addition, home prices increased by 15.4 percent in the past 12 months, a significantly higher rate than in past years, but the sharp upward trend of annual price increases moderated slightly.
“We are facing a complex reality, with significant developments in both the domestic and global economies,” Bank of Israel Governor Amir Yaron noted.
“Some are positive, indicating a recovery after the crisis and showing the return to strong activity, which in some measures is even higher than before the crisis. However, others are less positive, and indicate difficulties in supply chains, increased uncertainty and inflationary developments.”
How policymakers handle this range of developments is important to a successful economic outcome, Yaron said.
“Central banks’ monetary policy has considerable weight in how economic processes will develop in various economies and how they will be expressed in everyone’s daily life. Our main priority is to return inflation to its target range while maintaining as high a level as possible of economic activity.”