Israel Monetary Policy July 2022

Israel: Bank of Israel hikes for third straight meeting in July

At its 4 July meeting, the Bank of Israel (BoI) raised the policy rate from 0.75% to 1.25%—the highest level since 2013.

The decision to hike was driven by a desire to rein in inflation, which is currently well above the Central Bank’s 1.0–3.0% target range. Elevated inflation has also fed through to inflation expectations, which according to the Bank were above the upper bound of the target range on a one-year horizon. Moreover, the shekel has depreciated by 5.1% since the Bank’s May meeting, posing an upside risk to inflation going forward. The BoI also judged that the domestic economy was strong and that the labor market was at full employment, providing the leeway for a tighter stance.

In its communiqué, the BoI did not provide explicit guidance on future policy moves. That said, with inflation forecast to track well above the target range in the coming months, the Consensus is for several additional rate hikes by end-2022.

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

“Reflecting commodity price pressures and the shekel weakness, we expect that both headline and core inflation will track above the BoI’s +1.0-3.0% target through the remainder of the year, maintaining conditions for continued policy normalisation. However, we think that the pace and the extent of policy tightening may depend more on external developments, and we think will largely be a function of exchange rate pressures.”

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