Israel: Bank of Israel hikes for fourth straight meeting in August
August 22, 2022
At its 22 August meeting, the Bank of Israel (BoI) raised the policy rate from 1.25% to 2.00%—marking the highest level since 2012 and meaning that rates have risen by 190 basis points so far this year.
The decision to hike was driven by a desire to rein in inflation, which surged further above the Central Bank’s 1.0–3.0% target range in July. Moreover, the Bank judged economic activity to be strong, and stated that the economy was currently operating at full employment, providing further motivation for the hike. Finally, the rate rise was likely partially aimed at cooling a red-hot housing market: The volume of new mortgages remained historically high in July, and house prices rose around 18% in June.
In its communiqué, the BoI suggested that interest rates would continue to rise going forward, in order to tame price pressures. The Consensus is currently for close to 100 basis points of extra tightening this year, in light of likely further aggressive tightening by the Fed and the expectation that domestic inflation will stay well above the target range.
Giving their take on the monetary policy outlook, analysts at Goldman Sachs said:
“[We] expect the BoI to hike rates in the two remaining MPC meetings this year. Beyond this, we think that a key factor determining the extent of tightening will be the exchange rate. If the recent Shekel appreciation proves durable, and the currency returns to an appreciation trend (which, in our view, is warranted by economic fundamentals), we think that this would negate the need for more significant tightening. At the same time, if the Shekel weakness returns […] the risk is that the BoI will deliver more in the near-term than implied by our baseline forecast.”
Author: Oliver Reynolds, Economist