By Steven Scheer and Ari Rabinovitch
JERUSALEM (Reuters) -The Bank of Israel on Monday raised its benchmark interest rate by another half a percentage point, the eighth straight meeting it has increased rates, citing inflation running above 5% and concerns over wages and fiscal spending.
The central bank lifted its key rate to 4.25% – its highest level since late 2008 – from 3.75%. In April, policymakers began raising the rate from 0.1% and have been aggressive during a front-loading process.
“The Israeli economy is recording strong economic activity, accompanied by a tight labour market and an increase in the inflation environment,” the Bank of Israel said, noting that the shekel remains volatile.
Most analysts believe the tightening cycle is close to over since officials last month said the terminal rate would be 4% or a bit above. The central bank, however, did not address this or change its usual phrasing on the possibility of future rate hikes.
“The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals,” it said, using the same statement from recent decisions.
Despite the rate hikes, Israel’s annual inflation rose to a 14-year high of 5.4% in January from 5.3% in December – well above the government’s 1%-3% annual target range and fuelling public anger at spiking living costs.
“Monetary tightening policies in Israel and worldwide, and the moderation of demand, act to moderate inflation,” the central bank said.
But “the extent of fiscal expansion and the development of wages will have an impact on the inflation rate’s convergence to its target”, it said, referring to an expected increase in spending in the upcoming 2023-2024 state budget.
Policymakers say they are determined to push inflation back into the target range, which is expected later in 2023.
“A 50-basis-point hike and it is not over,” said Bank Leumi chief economist Gil Bufman, expecting another 25-bp move at the next meeting on April 3.
At the same time, Israel’s economy grew a faster-than-expected 6.5% in 2022, although growth is expected to slow to below 3% this year amid the steep rate hikes.
A Reuters poll had found that nine of 15 economists had expected a 25-bp move, while six others foresaw a 50-bp hike.
There were just five MPC members voting on Monday after one voting member resigned last month.
(Reporting by Steven Scheer; Editing by Nick Macfie)
