Photo Credit: Adele Lipkin / TPS
Bank of Israel

The Monetary Committee of the Bank of Israel (BOI) Monday announced its decision to once again raise the rate of interest, this time by 0.25 percentage points to 4.5 percent. As was the case the previous times it raised the rate, the BOI cited continued high inflation rates as the underlying cause of its decision.

Communications Minister Shlomo Karhi attacked the decision on Twitter, wondering if the Governor of the Bank of Israel couldn’t just be simply replaced with a robot who automatically raises interest rates, and asking why the BOI governor isn’t working to opening up the banking industry to competition:


“Thanks to the governor of the Bank of Israel for the magnificent holiday gift he gave to the citizens of Israel.
With such obtuseness on the eve of Passover, perhaps it is possible to put a robot in the position of governor who will make decisions on interest rate increases based on an objective algorithm and disconnected from the people.
And maybe it’s worth getting busy with opening up the banking cartel to competition, and not just letting the banks get rich from the interest.”

Explaining himself further, Karhi posted (translated):

1. I respect the Bank of Israel as an independent body, there is no doubt that its independence is important to Israel’s economy, and I did not even hint that its independence should be harmed, but no one is immune from criticism. This is a democracy.

2. As a matter of fact, have we really seen that interest rate hikes have lowered inflation? The answer is no. The inflation base widened and it became “sticky”.

3. In my opinion, the monetary committee should stop for a moment to think, especially on the eve of Passover, whether it is not worth waiting and seeing how the interest rate increases so far will affect.
In 2008, after the crisis, there were cases where the Bank of Israel kept the interest rate unchanged and explained that it was waiting for the effect of the new level to take effect. It also happens in the world. It’s a process that takes time. You have to let the interest tools do their thing. You don’t need opacity and a light hand on the trigger. There is no trouble equal to the damage of the king.

4. The governor is the government’s senior economic advisor. Already in the previous government and certainly now, apart from interest rate increases, an economic plan should have been proposed to combat the causes of inflation. Meanwhile, we try to do it in different ways.

5. It is clear to every child who the biggest beneficiaries of interest rate increases in an uncompetitive market are, therefore:
Competition! It’s not just that the business sector withdraws funds from bank offices and moves to other channels. NIS 20 billion net profit per year for the four largest banks is a resounding competitive failure.

The Shekel gained slightly against major foreign currencies as a result of the raise. A nation’s debt to GNP and monetary policies have a direct influence on the value of its currency against those of other nations.

According to the data released by the BOI, inflation in Israel was 5.2 percent over the past 12 months and is high in a wide range of CPI components. While there has been some moderation in annual inflation, the Bank said that the moderation was slower than in previous assessments. Inflation expectations and forecasts for the first year from all sources increased, and are around the upper bound of the target range. Expectations derived from the capital market for the second year onward are all within the target range.

Since the previous policy decision, the CPI increased by 0.5 percent in February. With that, inflation in Israel remains lower than in most of the advanced economies. Net of energy and fruits and vegetables, inflation is 5.1 percent, and the figure remains 5.1 percent with the further neutralization of the effects of taxation and regulation. The pace of annual inflation of the nontradable components, which mainly reflects the housing component and services industries, is 5.5 percent—similar to the previous month. In contrast, the annual pace of inflation of the tradable components declined to 4.8 percent. One-year inflation expectations and forecasts from all sources increased, and are around the upper bound of the target range. Expectations derived from the capital market for the second year and onward declined slightly, and are within the target range. The Monetary Committee’s assessment is that the monetary tightening processes in Israel and abroad, and the moderation of demand, are working to moderate inflation.

Economic activity in Israel is around the long-term trend, but its expansion has slowed relative to last year. The labor market is tight, and the employment rate remains at a level that reflects full employment. However, the job vacancy rate continues to decline moderately, said the BOI.

Governor of the Bank of Israel Amir Yaron commented on the decision saying, “Inflation in Israel has been above the upper bound of the target range for some time, and according to the various expectations and forecasts, it is expected to moderate in the coming 12 months and to return close to the target range of 1–3 percent.”

“The increase in prices is reflected in a wide range of CPI components,” he added. “Alongside a decline that we have seen in recent data regarding the inflation rate for tradable products, among nontradable products, made up primarily of the housing component and service industries, there has not yet been a notable moderation. These components are the “sticky inflation” components. The Monetary Committee assesses that the monetary tightening processes in Israel and abroad and the easing of demand are acting to moderate inflation.” News Desk contributed to this report.


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