The Bank of Israel said on Monday that a decision to raise rates by a higher than expected half-point last month was influenced by a prolonged weakening of the shekel in recent months.
Minutes of the Feb. 20 decision showed that four of the five rate setters at the Bank of Israel supported hiking the benchmark interest rate by 50 basis points to a more than 14-year high of 4.25%, a move meant to rein in inflation. In a statement, the central bank cited "the persistence of inflation and the prolonged (shekel) depreciation in recent months". It added: "The Israeli economy is recording strong economic activity, accompanied by a tight labour market and an increase in the inflation environment." One member of the bank's monetary policy committee (MPC) voted for a smaller 25-basis-point increase to 4%. Of the 15 economists polled by Reuters ahead of the meeting, nine projected a 25-basis-point hike while six foresaw 50 basis points. But since late January, the shekel has slid further versus the dollar on the heels of planned judicial reforms that give the government greater sway on selecting judges and limit the power of the Supreme Court to strike down legislation.
This has
alarmed investors who fear Israel might join a growing list of emerging markets taking a more authoritarian approach to decision-making. At one point last week, the shekel had lost nearly 10% against the dollar in one month.
On Monday, it was up some 2% against the U.S. currency.
The rate hike, which had been expected, was the central bank's eighth such move in an aggressive tightening cycle since last April, and followed a 50-basis-point hike in January.
Inflation reached a 5.4% rate in January, its highest since 2008, and well above a 1-3% target.
Bank of Israel Deputy Governor Andrew Abir told Reuters after the rate hike that the MPC chose a half-point move instead of a quarter-point as it was "important to show our determination to bring down the level of inflation". He added: "We've got some way to go in order to bring inflation down to our target."
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 MPC usually has six voting members but one policymaker resigned and has not yet replaced. (Reporting by Steven Scheer Editing by Mark Heinrich)
Messaging: steven.scheer.thomsonreuters.com@reuters.net; Twitter: @StevenMScheer))