Israel's Central Bank Will Raise Rates By 25 Or 50 Basis Points, Although Economists Are Divided On The Magnitude Of The Increase

This week, Israel's central bank is likely to raise interest rates by up to a half percentage point, which might be the final move in an aggressive tightening cycle aimed at bringing inflation back to its 1%-3% annual goal range.

Most economists anticipated a 25-basis-point hike in February to boost the rate from 3.75 percent to 4 percent, which would be its highest level since October 2008, based on the Bank of Israel's statement last month that it envisaged an interest rate ceiling of roughly 4 percent.

As a result of what the central bank calls a "front-loading" cycle, the rate has increased from 0.1%.

Inflation and growth figures released this week, however, exceeded expectations, leading experts to believe that an increase of 50 basis points is now likely.

Citi strategist Bhumika Gupta predicted that the Bank of Israel would follow the U.S. Federal Reserve's move to quarter-point moves.

"But, given that the most recent inflation reading is the highest in the cycle to yet, the market is now pricing in a greater likelihood of a 50 basis point increase," she said, adding that the terminal rate will likely be 4.5% rather than 4.2%.

In January, the annual inflation rate reached a new high of 5.4%, surpassing both the Reuters consensus and December's rate of 5.2%.

Simultaneously, Israel's economy grew at an annualized rate of 5.8% in the fourth quarter compared to the previous three months, which was more than double projections and will propel growth in 2022 to 6.5%.

Nine of the fifteen economists surveyed by Reuters anticipate a 25 basis point increase, while six anticipate a 50 basis point increase when the central bank announces its decision on Monday at 4:00 p.m. (1400 GMT).

Victor Bahar, an economist at Bank Hapoalim, stated, "Apprehension of the detrimental impact on mortgage borrowers is the sole element that may mitigate the increase in interest rates."

According to him, policymakers are also examining the Israeli government's proposed judicial reforms, "especially if it leads to a further depreciation of the shekel beyond what has already been documented."

The following rate decision is scheduled for April 3.

Experts predict that as a result of China's reopening and the relaxation of other pricing pressures, inflation will return to its objective by the end of 2023, which might force the initiation of interest rate decreases, particularly if the rate hikes severely hinder economic development. In 2023, the Israeli economy is projected to expand by less than 3%.