Hike rates

Bank of Israel to hike rates by a quarter point next week as inflation hits 4%

The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun/File Photo

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  • Tariff decision expected at 13:00 GMT on Monday
  • Some analysts expect a stronger rate hike of 0.4 points to 0.75%
  • Inflation rate at 4.0% in April, the highest since mid-2011
  • Analysts reject 1.6% GDP contraction in first quarter

JERUSALEM, May 18 (Reuters) – The Bank of Israel is likely to raise short-term interest rates by a quarter point next week to contain rising inflation, partly caused by low unemployment. and strong economic growth.

Of 14 economists polled by Reuters, 11 expect the central bank’s Monetary Policy Committee (MPC) to raise the benchmark rate (ILINR=ECI) to 0.6% from 0.35% when it announces its decision on Monday in 4 p.m. (1 p.m. GMT). Three others anticipate a stronger rise of 0.4 points to 0.75%.

“In view of inflation, the depreciation of the shekel and the rise in interest rates around the world, and despite the weak growth figure”, the Bank of Israel will raise its key rate by 0.25 point, said Ofer Klein, head of economics and research at Harel Insurance. and Finance.

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Policymakers began a tightening cycle last month, raising the rate to an all-time low of 0.1% for its first rate hike since 2018 and where it had been since a 0.15 point cut at the start of the COVID-19 pandemic.

Israel’s inflation rate hit a new high since 2011 of 4% in April, above the government’s annual target of 1% to 3% and joins the United States and some European central banks in a tightening policy to try to relieve pressure on prices.

Some analysts predict inflation close to 5% before moderating.

Meanwhile, Israel’s economy contracted 1.6% year-on-year in the first quarter from the previous three months, but economists have widely dismissed that figure as misleading and said the economy – which increased by 8.2% in 2021 – remains robust. The Bank of Israel estimates economic growth at 5.5% in 2022. read more

Israel’s unemployment rate fell to 3.1% in April from 3.4% in March, underscoring a tight labor market and fears of a wage hike.

Consequently, analysts believe that a 0.4 point increase in key rates is possible.

The Bank of Israel will likely raise rates to “reach the point of neutrality, if not stricter than neutrality,” as soon as possible, said Bank Leumi chief economist Gil Bufman.

Citi economist Michel Nies said he could “almost as well argue for a 40 basis point hike and mostly choose the 25 basis point hike” because “it could give the Bank of Israel more options at next meeting.”

Analysts widely expect rates to hit 2% next year.

The bank’s own economists predict an inflation rate of 3.1% for the coming year and a rising key interest rate of 1.5%. Central bank chief Amir Yaron said he expected Israel to move more slowly than its peers, with the pace of rate hikes depending on future data on inflation and growth.

A factor in favor of a weaker increase is the weaker shekel, which has depreciated 8% so far this year against the dollar. A larger rate hike, analysts say, could quickly strengthen the Israeli currency and hurt exports.

The shekel last week appreciated from 3.47 to 3.35 to the dollar.

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Reporting by Steven Scheer Editing by Bernadette Baum and Jonathan Oatis

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