Bank of Israel to raise rates 25 bps next week, may be last in cycle – Reuters poll

By Steven Scheer

JERUSALEM (Reuters) – Israel’s central bank is expected to raise short-term interest rates by another quarter-point to a more than 16-year high next week, in what may be the last increase in an aggressive tightening cycle aimed at battling persistent inflation.

All 15 economists polled by Reuters projected a 25 basis points (bps) hike to 4.75% – which would be its highest since late 2006 – when the central bank announces its decision next Monday at 4 p.m. (1300 GMT).

A number of economists, including Goldman Sachs (NYSE:) and JP Morgan Chase (NYSE:), changed their forecast to a 25 bps hike from no move after stronger than expected inflation and economic growth data earlier this week.

Israel’s annual inflation rate held steady at 5% in April versus expectations it would ease to 4.7%, and stayed well above an official annual target of 1-3%.

“It will be hard for the BoI (Bank of Israel) to look through the April’s high print, especially as it had already sounded relatively hawkish hinting to further possible hikes in case data remain firm,” said JP Morgan economist Anatoliy Shal.

Shal believes the cycle will end next week and expects rates to stay on hold for the rest of the year, before the Bank starts cutting them in early 2024.

When it began hiking rates in April of 2022, the Bank of Israel had initially hoped its front-loading stance would be able to cap its key rate at around 3%. But inflation has remained sticky, partly due to a weaker shekel against the dollar, and it continued to tighten.

The inflation rate has stayed at at least 5% since last October and peaked at 5.4% in January.

Bank Leumi Chief Economist Gil Bufman noted “the drop in inflation in Israel since its peak is low compared to the other countries”. The median decline of other OECD countries stands at 2.6 percentage points, he said, even as Israel’s rate has been lower to begin with.

Israel’s economy grew an annualised 2.5% in the first quarter, according to a preliminary estimate, higher than a Reuters forecast of 1.8%. Forecasts for growth in 2023 range from 1.5% to 2.7%.

Goldman’s Tadas Gedminas believes more hikes this year are possible following a price increase in government supervised basic food items.

“The inflation decline will be relatively limited this year given shekel weakness, which is why we continue to lean on the hawkish side,” he said.

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