• Central bank lifts borrowing costs by 25 basis points, citing inflation above 5% and a tight labor market; sees signs of moderation in economic activity

TEL AVIV (Agencies): The Bank of Israel on Monday raised its benchmark interest rate for a 10th consecutive time, lifting borrowing costs by 25 basis points to 4.75% as it struggles to tamp inflation growth in recent months.
“Economic activity in Israel is at a high level, and is accompanied by a tight labor market, although there is some moderation in a number of indicators. Inflation is broad and remains high,” the central bank said in a statement citing the reasons for the rate hike. “The tighter monetary policy and moderation of activity abroad are expected to lead to a slowing in the pace of inflation alongside some slowdown of economic activity in Israel.”
The central bank’s move comes after the consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, rose in April at almost double the rate than was forecast. The April CPI increased by 0.8% above analysts’ expectations of 0.4% to 0.5%, taking annual inflation over the past 12 months to 5%, according to data released by the Central Bureau of Statistics on May 15. The April CPI monthly reading is the highest since July 2022.
Over the past year, the Bank of Israel has steadily hiked its benchmark interest rate — to 4.5% in April this year from a record low of 0.1% — in a bid to rein in inflation. Despite the steps, inflation has been hovering above 5% in annual terms for more than six months, far above the government’s target range of 1% to 3%.
“Inflation in Israel is ‘sticky’ and high, and it is notable that the level by which inflation has been reined in is low compared to what has occurred in other developed countries,” Bank Leumi economists wrote in a research report, adding that an additional rate hike above this level could be in the offing this year.
Following April’s high inflation figure, economists at Leumi, Bank Hapoalim and Psagot Investment house had already put up their stakes for borrowing costs to go up to 4.75%. Earlier this month, the US Federal Reserve lifted interest rates by 0.25 percentage points to a benchmark rate of between 5% and 5.25%, up from near zero in March 2022.
The aggressive interest rate hikes by the Bank of Israel have rapidly fueled the costs of mortgage holders who are struggling to pay off monthly payments. Over the past year, the average cost of monthly mortgage payments has gone up by an estimated NIS 1,000.
Bank of Israel governor Amir Yaron said the central bank remains committed to do everything to bring down inflation back into the government’s target range.

By Media

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