Even as a top central banker cautioned that borrowing costs would need to go higher to get a grip on inflation, Israel raised interest rates less than expected by most economists.
The longest monetary tightening cycle in decades remains intact as policymakers raise the benchmark rate from 2.75% to 3.25% for the sixth consecutive year. The core rate is likely to climb above 3.5% in the next few months, according to Andrew Abir, a monetary voting committee and central bank’s No. 2 official.
Contrary to expectations, the pace of hikes slowed for the first time since the central bank began its campaign in April. While higher borrowing costs are starting to filter through to the broader economy, the decision suggests the central bank requires more caution. This occurred despite an unexpectedly significant acceleration in inflation last month. Following the announcement on Monday, interest-rate swaps that forecast expectations in a year fell. The shekel stayed relatively intact.
Bank of Israel Diverges from Federal Reserve.
The Bank of Israel is heading in a different direction than the US Federal Reserve. This month, the Fed increased rates by 75 basis points for the fourth time in a row. In recent weeks, central banks in wealthy nations such as Canada and Australia have shifted away from dramatic rate increases.
Consumer prices in Israel increased by an annual 5.1% last month, recovering from a July deceleration. According to Governor Amir Yaron, the central bank was “aiming” to reverse inflation by front-loading increases and returning it to within the government’s 1% to 3% target.
The Outlook for Israel Is Meanwhile Growing More Challenging
Unemployment increased again to 4.1% in October, the highest this year, according to figures released earlier Monday. Unemployment remains well below previous all-time lows. Yet it still signals a deterioration in the labor market that may influence monetary policy. On Monday, the central bank cited “a slight drop in employment data” in recent months. Although, it remained cautiously optimistic about Israel’s economy.
Currently, experts believe there is still room for rising borrowing costs. Over the next year, interest-rate swaps are pricing around 35 basis points of rate hikes. The benchmark was expected to reach 3.5% only in October 2023, according to the central bank’s research team last month.