Home Interest rate Israel’s central bank chief sees rates peaking at ‘3% and above’ while avoiding recession

Israel’s central bank chief sees rates peaking at ‘3% and above’ while avoiding recession

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  • Israel has hiked rates five times since April to 2.75%
  • Tariffs are “essentially restrictive”
  • Early hikes avoid higher rates in the future-Yaron
  • Inflation becomes a demand problem-Yaron

JERUSALEM, Oct 6 (Reuters) – Israel’s aggressive cycle of interest rate hikes aimed at reducing inflation was “well advanced”, Bank of Israel Governor Amir Yaron said. price pressures starting to ease and inflation hopefully returning to its target range. Next year.

Israel will likely avoid a recession, Yaron said, and growth will be stronger than the United States and Europe. Analysts increasingly believe that the eurozone economy will contract this winter.

The central bank has raised its benchmark interest rate (ILINR=ECI) five times since April to a high of 2.75% from a decade high of 0.1% – the last two moves at the end of August and last Monday being 75 basis points. Read more

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After hitting a 14-year high of 5.2% in July, Israel’s inflation rate fell to 4.6% in August, but remained well above an official annual target of 1% at 3% and almost half the levels of the United States and Europe.

The rate “is in a fundamentally restrictive range and it will probably need to go above 3%, or what I call three more, in order to bring inflation back towards the center of the target,” Yaron said in an interview with Reuters. . .

Bank of Israel economists forecast inflation of 4.6% in 2022 and rising to 2.5% in 2023. Yaron said most of the reduction will occur in the second half of the second quarter and until in the summer. “It takes a while for these things to kick in, but we think this is the right magnitude (of rates) for the Israeli economy right now,” he said.

Central bank economists expect the key rate to reach 3.5% within a year.

Yaron said that while “early” interest rate hikes are “painful” for mortgage holders and others, it will avoid greater pain down the road, adding, “It will actually help avoid the need for higher interest rates”.

INFLATION DEMAND

Where the interest rate stops rising depends on a host of factors, including Israeli and global inflation, economic growth and real interest rates, he said. Yaron said he was looking for positive interest rates across the bond yield curve, but for now inflation-adjusted short-term rates remain negative.

“That’s why we think we need to see three more…How events unfold will determine how fast or slow or how high we could go from here,” he said, noting that not all inflation was due to external factors.

Once rates peak, they’ll likely stay there as long as policymakers believe inflation is anchored to its target as well as other economic factors, Yaron said.

While the Israeli economy is expected to grow by 6% in 2022 after surpassing 8% last year, growth is expected to slow to 3% in 2023, mainly due to external forces.

“For almost all unemployed (people) there is a vacancy, so it gives us comfort to do this (policy) early loading,” he said, noting that public sector wages will likely rise after the election. from November 1. “Israel’s economy has very high growth and a very tight labor market.

“What we’re seeing is inflation seeping into a wider and wider set of CPI components…more and more into the demand-side components.”

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Reporting by Steven Scheer; Editing by Toby Chopra

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