Israel: Bank of Israel raises monetary policy rate for the first time in over seven years in November
November 26, 2018
On 26 November, the Monetary Committee of the Bank of Israel raised its interest rate by 15 basis points to 0.25%. This was the first time the Bank had changed rates since February 2015, when it lowered the rate to 0.10%. The decision to tighten rates during interim Governor Nadine Baudot-Trajtenberg’s first and last meeting heading the committee largely took markets by surprise who had expected to Bank to leave the interest rate unchanged.
The decision, which marked the first rate hike in over seven years, was taken on the grounds of stabilizing inflation within the Bank’s target range of 1.0%–3.0%. As of October, inflation stood at 1.9%. Sound labor market dynamics and government policies are expected by the committee to keep inflation within the target band, as should this latest interest rate move. According to the Bank, “the wage increases in the economy and the expansionary fiscal policy will support the entrenchment of inflation within the target range [while] the steep decline in oil prices in recent weeks may offset the factors supporting inflation, but its impact on the “adjusted indices” will be limited.” The committee noted that the key downside risk to the inflation outlook remained the possibility of a steep appreciation of the Israeli currency.
In its supporting statement, the Bank outlined that monetary policy remained accommodative—in spite of the increase to its interest rate—and conducive to anchoring inflation within its target range. Striking a slightly more hawkish tone compared to the previous meeting, the committee “assesses that the rising path of the interest rate in the future will be gradual and cautious”.
The Bank’s next monetary policy announcement is scheduled for 10 January 2019. This will be the first meeting under newly-approved Amir Yaron, whose term as governor will commence on 24 December if appointed by the Israeli president. Yaron’s appointment follows Karnit Flug’s resignation earlier in November.
Israel Interest Rate Forecast
FocusEconomics Consensus Forecast panelists see the interest rate ending 2019 at 0.63%. For 2020, our panelists see the interest rate ending the year at 1.20%.
Author: Jan Lammersen, Economist