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Israel is poised to increase interest rates to their highest level since 2008 on Monday, leading global central banks expected to extend a monetary tightening cycle to tackle faster inflation.
The Bank of Israel will likely raise its benchmark by 50 basis points to 3.75%, according to most economists surveyed by Bloomberg. A third of the analysts predicted a 25-basis-point hike instead.
“It’s not the last move,” said Alex Zabezhinsky, chief economist at Meitav DS Investments Ltd., who’s among those predicting a hike of 50 basis points.
The decision is set to prolong Israel’s longest unbroken series of rate increases in decades, even as the central bank started to raise borrowing costs in smaller increments from November.
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Rate setters worldwide have debated how quickly to tighten policy as they weigh the impact on economic growth. Three of the most influential central banks dialed back their pace of rate hikes in December.
Israel hiked rates by more than 300 basis points in 2022 as officials raced to mitigate price increases. Still, annual inflation reached 5.3% in November, the highest level since 2008, driven by rising costs for housing, apartment maintenance and food.
While the overall rate of price growth is below levels in the US and many European countries, it’s above the government’s 1% to 3% target range that was breached a year ago.
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The Bank of Israel expects rates to rise above 3.5% and stay there for most of this year, Deputy Governor Andrew Abir said in November. Citigroup Inc., Bank Hapoalim, and Bank Leumi see the benchmark settling between 3.75% and 4%.
The government estimates Israel’s gross domestic product expanded 6.3% last year, which would be among its strongest performances this century.
The country recorded a falling debt-to-GDP ratio, while unemployment remained close to record lows during 2022. It’s also reportedly on track to record a budget surplus for the year, according to figures obtained by Globes.
But many economists now expect growth to slow substantially in 2023, with a slim chance of recession.
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That’s a challenge for Benjamin Netanyahu, who was sworn in as prime minister last week after just 18 months in opposition.
Although he’s promised to tackle rising prices, Netanyahu’s new right-wing-religious coalition is expected to have a slightly looser fiscal policy than its predecessor.
“I’m afraid that there could be an increase to the debt-to-GDP ratio,” said Zabezhinsky. “We’ll have to see what the government does.”
–With assistance from Harumi Ichikura.
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