Israel Monetary Policy February 2022

Israel: Bank of Israel holds fire in February

At its 21 February meeting, the Bank of Israel (BoI) left the policy rate unchanged at 0.10%.

The decision to maintain rates was driven by lingering uncertainty over the evolution of the pandemic and of potential new Covid-19 strains, as well as by a desire to continue supporting the ongoing economic recovery. At the same time, both inflation and inflation expectations for the short, medium and long term are higher but still within, or very close to, the Bank’s 1.0%–3.0% target range, giving the Bank room to keep rates steady.

In its communiqué, the BoI adopted a more hawkish tone compared its previous publication, leaving behind the notion that it would maintain a loose monetary policy for a prolonged time and stating instead that “in the coming months, conditions will allow for the start of a gradual process of raising the interest rate in line with the path of inflation and the pace of growth and employment”. Consequently, most of our analysts now see a rate hike to 0.25% by the end of this year.

Murat Unur and Kevin Daly, economists at Goldman Sachs, added:

“We think that this hawkish shift was primarily driven by the strength of the growth data, rather than the upside surprise in inflation. […] We have been forecasting that the BoI will not hike rates until 2023 as we expect Shekel strength to reassert itself in the coming months (given the ongoing strength of the Israeli balance of payments) and inflation to start falling in Q2. This shift in communication increases the risks that the first rate hike comes earlier than we expect. Even then, we maintain our view that the hiking cycle will be more gradual than priced by the market.”

The next meeting is scheduled for 11 April.

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