Hike rates

Bank of Israel to raise rates by half a point to rein in inflation

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

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  • Tariff decision expected at 13:00 GMT on Monday
  • Further rate hikes expected throughout 2022
  • Inflation rate at 4.1% in May, the highest since 2011
  • The economy is expected to grow by at least 5% in 2022 after growing 8.2% in 2021

JERUSALEM, June 30 (Reuters) – The Bank of Israel is expected to raise short-term interest rates by half a percentage point next week to their highest level in nine years to rein in the inflation in a context of very low unemployment and strong economic growth. .

Of 15 economists polled by Reuters, 14 expect the central bank’s Monetary Policy Committee (MPC) to raise the benchmark rate (ILINR=ECI) to 1.25% – its highest since September 2013 – from 0.75 % in what would be his third straight hike. Another anticipated an increase of 0.25 points to 1.0%.

The bank will announce its decision on Monday at 4 p.m. (1300 GMT).

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A half-point hike would be the most aggressive policy move since a 3/4 point cut in early 2009 during the global financial crisis. It would also match its largest rate increase since late 2005 and track rate increases in the United States.

The Bank of Israel ‘wants to make sure the market knows it’s ready to fight inflation hard – to get it over with and lower inflation expectations,’ says Psagot’s chief economist , Ori Greenfield.

On the heels of global supply issues and rising wages due to a tight labor market, Israel’s annual inflation hit an 11-year high of 4.1% in May, below expectations and much less than in other Western countries.

Economists believe inflation could climb to nearly 5% – well above the government’s annual target of 1-3% – before moderating in 2023. Israel’s economy grew by 8.2% in 2021 and is expected to increase by at least 5% in 2022 and 4% next year. , while the unemployment rate stands at 3.5%.

The central bank will release updated macroeconomic estimates on Monday.

Analysts also cite recent big rate hikes by the US Federal Reserve and other central banks as pushing Israeli policymakers to a half-point move rather than a quarter-point move. They expect further rate hikes at subsequent meetings to bring the key rate down to around 2.5% by the end of the year.

Citi economist Michel Nies said expectations for aggressive hikes stemmed from the fact that the central bank had chosen “hawkish” options for the two previous decisions – raising rates by a quarter of a percentage point in April while the market expected 15 basis points and 40 basis points in May against expectations of a quarter of a percentage point.

“This suggests that the Bank of Israel sees the fact that Israel has lower inflation than other economies as an opportunity to get ahead of the curve rather than an argument for a faster pace of tightening. slow,” he said.

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Reporting by Steven Scheer; Editing by Hugh Lawson

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