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Key rate lifted to 4.25%, highest since late 2008
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Bank deputy governor sees inflation declining from
mid-2023
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Inflation in Israel remains above 5%
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Foreign minister criticises rate hike
(Adds comment from deputy governor, foreign minister criticism)
By Steven Scheer and Ari Rabinovitch
JERUSALEM, Feb 20 (Reuters) - The Bank of Israel on
Monday raised its benchmark interest rate by another
half a percentage point, and a senior official said more
increases were likely needed to rein in inflation that remains
above a 5% rate.
The central bank lifted its key rate to 4.25% - its highest
level since late 2008 - from 3.75%. It was the eighth straight
hike since policymakers last April first raised the rate from
0.1% in an aggressive front-loading process.
Israel's inflation rate hit a 14-year high of 5.4% in
January, above an official annual target of 1-3% but below many
Western peers.
Bank of Israel Deputy Governor Andrew Abir said they chose a
half-point move instead of a quarter-point since "it's important
to show our determination to bring down the level of inflation".
The central bank cited for the decision a strong economy, a
tight labour market and an increase in the inflation
environment, along with a volatile shekel , which fell 1%
on Monday to a nearly three-month low versus the dollar.
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. But Abir hinted at further tightening with the pace
dependent on upcoming data, even as rate hikes begin to moderate
housing costs due to fewer mortgage deals.
"Monetary policy-tightening is working, but we still think
we've got some way to go in order to bring inflation down to our
target," Abir said in an interview with Reuters, declining to
predict where rates would peak.
"Inflation is quite sticky. Services inflation is quite
sticky," he said, adding that price pressures were mainly
demand-driven.
'NOT OVER'
Abir expects inflation to start declining in the middle of
2023, while economists foresee inflation back in the target
range later this year.
"A 50-basis-point hike and it is not over," said Bank Leumi
chief economist Gil Bufman, expecting another 25-basis point
(bp) move at the next meeting on April 3.
Israeli foreign minister Eli Cohen said there was no
justification for the rate hike and sought a process to halt
future hikes. Bank of Israel Governor Amir Yaron replied that
the central bank's independence must be respected.
Inflation has been slower to ease in part due to a weaker
shekel. Abir estimated the exchange rate has a 15-20% influence
on inflation.
The shekel's weakness has been linked to investor jitters
over a planned judicial overhaul that would increase the
government's sway in choosing judges while also setting limits
to the Supreme Court's ability to strike down legislation.
"Clearly the process of judicial reform is turning out to be
controversial. I think it does have an impact on people's
confidence in the economy," Abir said.
Any impact the changes might have on monetary policy in the
short run would come from how they affected financial markets,
he said, adding: "In the medium term the impact could come from
a reduction in direct investments."
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.
Nine of 15 economists in a Reuters poll had expected a 25-bp
move. Six others foresaw a 50-bp hike. Five MPC members voted on
Monday after one voting member resigned last month.
(Reporting by Steven Scheer and Ari Rabinovitch; Editing by
Nick Macfie and Alex Richardson)
