Israel’s central bank will probably increase interest rates by a quarter percentage point on Monday, as inflation remains high and political strife over government plans to weaken the judiciary contributes to a slowing economy.
(Bloomberg) — Israel’s central bank will probably increase interest rates by a quarter percentage point on Monday, as inflation remains high and political strife over government plans to weaken the judiciary contributes to a slowing economy.
The move would match that of the US Federal Reserve, which last month raised the benchmark rate by 25 basis points to fight inflation. In March, Israel outpaced the US for the first time since starting to raise borrowing costs the previous April, increasing the rate to 4.25% from 3.75%.
All economists surveyed by Bloomberg expected an increase of a quarter percentage point, matching the Fed’s last move.
The bank’s decision is likely to be influenced by fierce domestic opposition to the planned judicial overhaul. Prime Minister Benjamin Netanyahu suspended the legislative process last week in response to mass protests, but Israelis are waiting to see if talks on a compromise plan achieve a blueprint agreeable to both sides.
“There is a dilemma between higher inflation than expected and more and more signs that growth is slowing due to uncertainty in the political sphere,” said Alex Zabezhinsky, chief economist at Meitav Dash.
The overhaul, unveiled in January, includes giving lawmakers final say on the appointment of new judges and allowing parliament to overrule high court decisions.
Supporters say the changes are needed to restore the balance of power between the branches of government, arguing that the Supreme Court has become overly interventionist. Opponents, who have been protesting in their tens of thousands throughout the country, say the plan undermines the country’s democratic values by crippling the most important brake on politicians.
Bank of Israel Governor Amir Yaron warned last month that the proposed revamp could lead to a dangerous brain drain. High-tech exports are one of the main growth engines of the economy, and there are fears companies could relocate abroad if they don’t trust the authorities. Exports of high-tech services declined by 0.9% in January following a drop of 5.6% in December.
Inflation has been outstripping the official 1%-3% target range for over a year, despite the longest tightening cycle in decades. “It’s probably not the time and the level to stop hiking now,” Victor Bahar, head of the economics division at Bank Hapoalim, said in a note.
Concern for the shekel may also influence the bank, in particular if there is a sudden depreciation, said Meitav Dash’s Zabezhinsky and others.
The currency jumped to its strongest level in more than a month after Netanyahu said March 28 that he would put the judicial overhaul on hold “to avoid civil war.” Since then it has been slowly weakening but hasn’t reached its March 17 low.
Most economic data for the first two months of the year have been positive, according to the Bank of Israel’s Composite State of the Economy Index, which indicated positive growth led by private consumption and a strong labor market. However, data has yet to be published on activity in March, when protests and strikes against the proposed legal changes intensified.
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