Israel’s Central Bank Announces Sharpest Rate Hike in 11 Years

The Bank of Israel’s monetary committee voted Monday to raise its base lending rate for the third time since April, this time by half a percentage point to 1.25 percent, the sharpest hike in 11 years in a battle against inflation.

The Bank of Israel also announced that it was expanding the so-called corridor around the interest rate at its credit and deposit windows to commercial banks. This number would be increasing from plus/minus 0.1 percent to plus/minus 0.5 percent.

As a result, commercial banks will be able to deposit money at the Bank of Israel at a rate of at least 0.75 percent, and borrow at a rate not topping 1.75 percent.

The rate hike, which goes into effect Thursday, will increase the interest that businesses and households pay on loans, including mortgages. Israelis taking out home loans now will pay the highest rates, but even borrowers with an existing mortgage will pay a higher rate on the portion of the loan carrying variable interest.

“We are facing a complex reality, with significant developments in both the domestic and global economies,” Governor Amir Yaron told a press conference. “Some are positive, indicating a recovery after the crisis and showing the return to strong activity, which in some measures is even higher than before the crisis. However, others are less positive and indicate difficulties in supply chains, increased uncertainty and inflationary developments.”

At the same time, the Bank of Israel’s Research Department predicted that Israel’s gross domestic product would grow by 5 percent in this year, down from a previous forecast of 5.5 percent. Inflation is expected to reach 4.5 percent, up from a previous forecast of 3.5 percent, before inflation declines to 2.4 percent next year.

The researchers expect the central bank’s key rate to average 2.75 percent in the second quarter of 2023.

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The interest rate rise comes in response to accelerating inflation. Israel’s consumer price index rose 4.1 percent year on year in May, above the government’s target of between 1 percent and 3 percent.

Rising inflation has hit much of the world. To battle rising prices in the United States, the Federal Reserve boosted rates by 0.75 point last month – the Fed’s biggest hike since 1994 – to a range between 1.5 percent and 1.75 percent. It was the Fed’s biggest hike since 1994.