Israel’s central bank is poised to deliver an unprecedented 10th consecutive interest-rate hike Monday to try to damp inflation even with borrowing costs already at their highest level since 2006.
(Bloomberg) — Israel’s central bank is poised to deliver an unprecedented 10th consecutive interest-rate hike Monday to try to damp inflation even with borrowing costs already at their highest level since 2006.
A monetary tightening cycle starting in April 2022, when rates were close to zero, hasn’t managed to tame inflation that’s on track to exceed the government’s target for the second year. Continued weakness in the local currency is among factors fanning price growth.
Economists surveyed by Bloomberg unanimously predict the Bank of Israel will raise the benchmark rate to 4.75% from 4.5%, matching the 25 basis-point increase by the US Federal Reserve this month.
“Though the direction seems to be changing elsewhere in the world, Israel isn’t there yet,” said Guy Beit-or, chief economist at Psagot Investment House, who forecasts a rate rise of at least 25 basis points. “April inflation was nothing less than dramatic.”
Inflation in April was 5% from a year earlier, exceeding the government’s 1% to 3% target range. On a monthly basis, it reached 0.8%, double what economists had anticipated.
April’s surprise price surge was driven by higher costs for housing rentals, produce and outbound travel, stoked in large part by the Jewish Passover holiday.
Given that the shekel is down about 3.8% against the dollar this year, Goldman Sachs Group Inc. said that “without the support of the exchange rate, it will be much harder for the central bank to achieve its inflation objective.”
Expectations in the market are for more monetary tightening ahead. Israel’s one-year currency swaps indicate investors see the base rate rising near 5% a year from now.
Israel Discount Bank doesn’t rule out a further hike beyond April and sees rates staying high for long. “We aren’t convinced that the Bank of Israel will rush to lower interest rates,” it said in its economic review released Wednesday.
While Israeli inflation has remained elevated, 2023 economic growth forecasts have been dropping. On Tuesday, the Finance Ministry reduced its outlook to 2.7% growth from a previous 3%, citing global and local developments.
The International Monetary Fund sees growth slowing to 2.5%, from 6.5% in 2022. Continued uncertainty around the government’s contentious proposal to weaken the courts presents a notable downside risk to growth, the IMF said in a report this month.
Moody’s Investors Service recently downgraded its outlook on the country to stable from positive, citing a “deterioration of Israel’s governance,” while keeping Israel’s A1 rating in place. Although S&P Global Ratings didn’t change Israel’s stable outlook or AA- rating, it forecast the economy in 2023 will gain just 1.5%.
Last Tuesday, the Central Bureau of Statistics reported that first-quarter gross domestic product expanded a seasonally adjusted, annualized 2.5%, decelerating sharply but still exceeding the projections of analysts.
With a global recession still seen looming, however, economists expect monetary tightening in Israel to taper off in the coming months.
“The economic weakness that is taking shape in Israel and, moreover, worldwide, is expected to deepen significantly in the coming weeks and months, leading central bankers across the world to halt their rate hikes — ultimately forcing the Bank of Israel’s hand, too,” Beit-or said in a research note.
–With assistance from Harumi Ichikura.
(Updates with swaps in eighth paragraph, adds chart.)
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