Israel pauses interest rate hikes, first time in a year

The Bank of Israel opted not to raise interest rates on Monday, a reversal from the yearlong set of rate hikes in response to inflation.

The central bank said it will keep interest rates at 4.75%. The Bank of Israel said “inflation is moderating” and is at 4.6% over the past 12 months.

“The Monetary Committee’s assessment is that the monetary tightening processes in Israel and abroad, and the moderation of demand, are working to moderate inflation,” said the bank in a press release.

At the same time, the Bank of Israel noted that inflation remains above its target range of 1-3%. This could indicate more rate hikes in the future. Central Bank Governor Amir Yaron told reporters on Monday that the bank may increase rates in the future.

“It is certainly possible that we will need to increase the interest rate going forward if we see evidence that the inflation environment is not moderating at a suitable pace,” said Yaron, according to Bloomberg.

The Bank of Israel predicted gross domestic product (GDP) will rise 3% in 2023 compared to 6.5% in 2022. The bank warned of decreasing job vacancy rates, meaning fewer available jobs.

“Economic activity in Israel remains strong, but a number of economic indicators point to some moderation in activity. The labor market remains tight and in a full employment environment, but the downward trend in the job vacancy rate continues,” said the bank.

Central banks tend to raise interest rates to bring down inflation and cut interest rates to spur economic growth.

Why it matters: The Bank of Israel instituted 10 straight rate hikes from April of last year until this past May in an effort to bring down inflation. The current interest rate of 4.75% is the highest since 2006.

In May, the bank raised rates by 0.25%, noting that inflation was at 5% at the time. 

Inflation is rising across the Middle East and the world, in part due to the supply chain disruptions resulting from the Russian invasion of Ukraine last year.

The US Federal Reserve also opted to pause its interest rate hikes in June, promoting central banks in the Gulf to follow suit.

Know more: Israel is experiencing a few economic problems in addition to inflation. Israel’s tech sector has been experiencing a downturn in the past year or so marked by layoffs and reduced investment.

The government’s controversial judicial reform plans have also led to warnings of political instability from banks and credit rating agencies, as well as an exodus of money from the country. 

What's next: The Bank of Israel will make its next decision on interest rates on Sept. 4.