Israel’s central bank moderated the pace of its monetary tightening, striking a balance between the economic impact of ongoing political turmoil and stubbornly high inflation.
(Bloomberg) — Israel’s central bank moderated the pace of its monetary tightening, striking a balance between the economic impact of ongoing political turmoil and stubbornly high inflation.
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.
The political crisis stemming from the government’s plan to dilute the power of the courts “could impact substantially on the economic and financial developments in the short term and in the longer term, and therefore on the monetary policy that will be required in the forecast period,” Bank of Israel Governor Amir Yaron said in a statement Monday. “It is no secret that at this time of great uncertainty, in Israel and abroad, compiling a forecast is more complicated than ever.”
Shekel Pares Gains as Growth Concerns Offset Rates Bump
The central bank laid out different growth scenarios depending on how the highly controversial judicial plan develops, reducing the 2023 forecast to 2.5% from a previous 2.8% even in the best-case event of an amicable resolution.
Should the dispute start to weigh on risk, exports, investment and consumption, the potential impact could be a 2.8% annual hit to GDP over the next three years, the bank said. The proposals have already led to protests by hundreds of thousands of people and nationwide strike, and talks are underway between Prime Minister Benjamin Netanyahu’s government and opponents over a way forward.
Yaron said he hoped Israel is approaching the end of its cycle of hikes, echoing a change in language in the central bank statement referring to the “interest rate path” rather than hiking cycle as previously.
Wait and See
Netanyahu suspended the legislative process last week in response to the 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. 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 the first three months of the year, in part because of the ferocious opposition to the proposed judicial overhaul.
–With assistance from Alisa Odenheimer and Dana Khraiche.
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