Bank of Israel says interest rate hikes to start soon as economy strong

JERUSALEM, Feb 21 (Reuters) – The Bank of Israel reversed course on Monday, saying it would soon be forced to raise short-term interest rates due to robust economic growth and rising price pressures, as it held rates steady for a 15th straight policy-setting meeting.

At the last meeting six weeks ago policymakers said there was no hurry to start tightening while inflation was expected to remain benign, in contrast to elsewhere in the West.

But since keeping its benchmark interest rate (ILINR=ECI) at an all-time low of 0.1% on Jan. 3, economic indicators have shown the economy heating up, overcoming the COVID pandemic, while inflation reached its highest level in more than a decade.

“The (monetary) committee’s assessment therefore is that in the coming months, conditions will allow for the start of a gradual process of raising the interest rate in line with the path of inflation and the pace of growth and employment,” it said in a statement.

The bank said higher rates would support the achievement of the “monetary policy goals and to ensure the continued proper functioning of the financial markets”.

This was a big change from its longstanding prior statement that it would “continue to conduct an accommodative monetary policy for a prolonged time.”

Analysts are split as to the timing of the rate increase, with some saying it could come as early as the next decision on April 11. Others believe it could be May 23 or July 4, with the Bank of Israel waiting for the U.S. Federal Reserve to lift rates first.

“It’s not clear yet how aggressive the cycle will be, but we don’t expect rates to rise particularly far in the coming years,” said Liam Peach, economist at Capital Economics, who expects rates to start to rise in April and reach 1% by 2023.

Central banks in Britain, Poland, the Czech Republic and others have already raised short-term rates to rein in spiking inflation.

Israel’s annual inflation rate rose to 3.1% in January from 2.8% in December, moving above the government’s 1%-3% annual target range for the first time since 2011. The Bank of Israel said it foresaw the rate staying in the target range in the coming year.

At the same time, a rapid COVID-19 vaccination roll-out in which 46% of Israelis have received a third shot has led to an economic rebound, with growth of 8.1% in 2021 that topped the central bank’s 6.5% estimate. It projects 5.5% growth in 2022.

The bank noted that while economic growth was strong and unemployment near pre-crisis levels, “the risk of further morbidity cycles remains, and is leading to continued uncertainty regarding the expected intensity of economic activity.”

The shekel was 0.4% lower versus the dollar at a 3.215 rate.

All 17 economists polled by Reuters had said they expected the monetary policy committee to keep rates steady, as it has since cutting them from 0.25% at the outset of the COVID-19 pandemic.

Reporting by Steven Scheer and Ari Rabinovitch; Editing by Andrew Heavens and Catherine Evans

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