Israel’s central bank moderated the pace of its monetary tightening, striking a balance between rising inflation and signs of slowing growth due to political turmoil.
(Bloomberg) — Israel’s central bank moderated the pace of its monetary tightening, striking a balance between rising inflation and signs of slowing growth due to political turmoil.
The Bank of Israel raised its benchmark rate to 4.50% from 4.25% — the highest level since 2006 — in the ninth straight increase since it began its tightening cycle a year ago. All 12 economists surveyed by Bloomberg predicted the increase of a quarter percentage point, matching the Federal Reserve’s last move.
Stubbornly high inflation and a political crisis stemming from the government’s plan to dilute the powers of the courts are weighing heavily on the economy.
“The interest rate path will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals,” the bank of Israel said in a statement Monday.
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. The central bank has revised its macroeconomic forecast “in view of the tremendous uncertainty due to the legislative processes concerning the judicial system and their economic implications,” it said.
Inflation, meanwhile, has been outpacing the official 1%-3% target range for over a year, despite the longest tightening cycle in decades. The central bank began raising rates last April.
“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 the Meitav Dash investment house, before the rate announcement.
Supporters say the changes to the judiciary are needed because the Supreme Court has become overly interventionist. Bank of Israel Governor Amir Yaron warned last month that the proposed revamp could lead to a dangerous brain drain.
Investment in Israel tech companies, an engine of the economy, dropped to the lowest quarterly rate in nearly five years, in part because of the ferocious opposition to the proposed judicial overhaul.
(Updates with Bank of Israel comment in fourth paragraph.)
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