The Bank of Israel raised its benchmark interest rate by half a point to 1.5%, as the country’s economists step up their fight to rein in runaway inflation.
The jump in rates comes months after the bank surprised economists by raising the rate from 0.35% to 0.75%, which was higher than expected. Many now expect the rate to eventually reach 2%. This comes after the bank kept the rate at a low of 0.01% for several years.
The higher rates are designed to restrict the flow of money by making borrowing less attractive, which ultimately dampens consumer demand and alleviates inflationary pressures caused by an insufficient supply of goods and an excess supply of cash.
According to the BoI, inflation in Israel over the past 12 months is 4.1%, and it will get worse before it gets better, with estimates showing it will rise to 4.5% for 2022 before falling back to 2.4% next year. He notes, however, that other developed economies have even higher rates. In the United States, inflation is 8.6%, according to figures published in May.
While the bank says the economy continues to grow, it warns that “the possible slowdown in global economic activity given the effects of the war in Ukraine and the slowdown in manufacturing activity in China, as well as the political uncertainty in Israel, can have a negative impact on economic activity.
As housing price protests rise again, the BoI confirms that house prices have skyrocketed by more than 15% in the past year, “a significantly higher rate than in previous years”. However, he says those numbers have started to show signs of stabilizing.