Israel Monetary Policy January 2023

Israel: Bank of Israel hikes for seventh straight meeting in January

At its 2 January meeting, the Bank of Israel (BoI) raised the policy rate from 3.25% to 3.75%.

The decision to hike was once again driven by a desire to dampen broad-based price pressures; both inflation and core inflation moved further above the Central Banks 1.0–3.0% target range in November. A tight labor market and strong economic momentum were likely further factors behind the BoIs decision.

In its communiqué, the BoI suggested that monetary policy would continue to tighten going forward. That said, our analysts judge that interest rates are now close to their peak, as market inflation expectations are still within the target range and headline inflation is expected to decline in the coming quarters.

Giving their take on the monetary policy outlook, analysts at Goldman Sachs said:

“While the Staff rate forecast is now in line with our terminal rate forecast of +4.00%, we nevertheless see hawkish risks to our baseline rate view in the near-term.[…] In our view, the main factor that could shift the balance in a more dovish direction is the exchange rate. […] However, the Shekel has largely tracked weakness in global equity markets and was significantly weaker over the course of 2022. Until this trend changes, the exchange rate will not provide meaningful support for bringing inflation back to target, which in turn should limit the room for the BoI policy to diverge from major central banks, and from its peers.”

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