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Bank of Israel raises interest rates again, citing high inflation

Israel’s central bank raised interest rates by 0.5% last month

View of Bank of Israel main offices in Jerusalem, Jan. 2, 2023. (Photo: Yonatan Sindel/Flash90)

The Bank of Israel on Monday raised interest rates to 4.5% – the highest it's been since before the global financial crisis of 2008. 

The bank also warned that the government’s planned judicial reforms could cause to economic damage. 

The Bank of Israel lifted the benchmark interest rate – a rate used to determine other interest rates – for its ninth straight meeting, citing inflation that rose at a faster-than-predicted rate during February. The move comes after a similar measure taken last month, when the bank raised the interest rates by 0.5%, bringing it up to a 15-year high of 4.25%. 

“Economic activity in Israel is at a high level, and is accompanied by a tight labor market, although there is some moderation in a number of indicators,” the bank said. “There has been some moderation in annual inflation, but the moderation is slower than previous assessments.”

The bank’s monetary committee raised the benchmark rate to 4.5% from 4.25%, the smallest increase since April 2022. This mirrored the move by the U.S. Federal Reserve, which raised interest rates by a quarter of a percentage point last month. 

Israel’s Diaspora Affairs Minister and Social Equality Minister Amichai Chikli gave an interview with Kan Radio Tuesday morning, in which he criticized Bank of Israel Governor Amir Yaron for prompting a drop in confidence in Israel’s economy. 

“I am very sorry for the Bank of Israel governor’s conduct. When he went to a foreign outlet and gave doomsday predictions about Israel’s economy, he sabotaged it,” Chikli said. “Economics is more [about] psychology, when you come and say that there will be ‘darkness over the surface of the deep,’ you create an image of the future. The prediction that you say is the prediction that you create.”

The social equality minister accused the bank governor of serving the “elites” and not the citizens of Israel. Chikli later issued a statement clarifying that he was referring to Yaron’s CNN interview, and that he supports the Bank of Israel’s independence. 

Chikli was not the only minister to make critical comments about Yaron.

Shortly after the increased interest rates were announced, Israeli Communications Minister Shlomo Karhi issued a sarcastic rebuke of Yaron on social media. 

“Thank you to the Bank of Israel governor for the fabulous holiday gift he granted to the people of Israel,” Karhi wrote, suggesting the government should appoint a robot as governor to “make decisions on interest hikes based on an objective algorithm that is disconnected from the people.” 

Karhi also said the banking “cartel” should be opened to competition and accused the bankers of getting rich on interest at the expense of the people. 

The communications minister later posted additional remarks clarifying his statements, but he did not retract them. He again cited the lack of competition in the sector and attacked the banks for collecting excessive profits. 

“NIS 20 billion net profit per year for the four largest banks is a resounding competitive failure,” Karhi said. 

The communications minister also said that instead of reactive measures like raising the interest rates, which he said has not been proven to work, the bank governor should have proposed an economic plan “to combat the causes of inflation.”

The All Israel News Staff is a team of journalists in Israel.

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