Bank of Israel to start rate hike cycle amid rising inflation

Israel's central bank chief Amir Yaron speaks at a news conference in Jerusalem
Israel's central bank chief Amir Yaron speaks at a news conference in Jerusalem January 7, 2019. REUTERS/Steven Scheer/File Photo
  • Rate decision due at 1300 GMT on Monday
  • Inflation rate at 3.5% in February, highest since 2011
  • Israel economy grew 8.2% in 2021, faster than expected
  • Rate hikes seen totalling as much as 140 basis points in 2022

JERUSALEM, April 7 (Reuters) - The Bank of Israel is widely expected to embark next week on its first tightening cycle in more than a decade to combat rising inflation partly caused by robust economic growth and a tight labour market.

Of the 14 economists polled by Reuters, 12 forecast that the central bank's monetary policy committee (MPC) will raise the benchmark rate (ILINR=ECI) to 0.25% from an all-time low of 0.1% when the decision is announced on Monday at 4 p.m. (1300 GMT).

Two others anticipate a stronger 0.25 point increase while some economists still believe there is an outside chance of a hike to 0.5% after recent data showed the jobless rate dropped to 3.2%.

"It's clear that they're going to hike," said Leader Capital Markets Chief Economist Jonathan Katz. "It's a full employment economy and job vacancies are going through the roof. There's excess demand for jobs that certainly is supportive of wage pressure and inflation, and growth numbers were all much, much stronger than anyone even anticipated."

Analysts project rate hikes of between one point to 1.4 points -- bringing the key rate to as much as 1.5% -- in 2022.

Israel's economy grew 8.2% in 2021, well above the most optimistic forecasts, after a 2.2% contraction in 2020. The annual inflation rate reached a 2011 high of 3.5% in February.

Policymakers earlier this year expressed a belief that rate increases were a way off since Israeli inflation was not as problematic as in Europe and the United States.

But as the inflation rate moved above the government's 1-3% annual target, the central bank abruptly changed course. In recent weeks Bank of Israel Governor Amir Yaron and deputy Andrew Abir have prepared the markets for higher rates, saying the cycle would move faster than expected.

"Central bank tightening cycles are usually slow at the start and comments from the Bank of Israel do not give the impression that policymakers are worried about inflation and that they will start tightening with a bang," said Liam Peach, an economist at Capital Economics, predicting rate hikes at each meeting for the remainder of the year.

The central bank raised rates 0.15 point in a one-off move in late 2018, while its last tightening cycle began in mid-2011. Its last rate change was a 0.15 point cut in April 2020 at the at the outset of pandemic. It has held rates for the subsequent 15 decisions.

The Bank of Israel will also issue updated macro estimates.

Reporting by Steven Scheer; Editing by Kirsten Donovan

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