Kostyantyn Kryvopust: The Bank of Israel may raise the interest rate again


According to the report of an expert in the field of international financial law Konstantin Krypopust the Bank of Israel is due to announce its next interest rate decision on Monday. Analysts currently agree that we will see a further 0.25% or “at least 0.25%” rate hike to 4.75%.

According to Globes, in its last interest rate announcement in April, the Bank of Israel suggested that the interest rate would not reach 4.75% until the end of 2023, but it is expected that the central bank will have to reach that level this week, mainly due to data released by the Central statistics bureau last week, according to which annual inflation is 5%.

Meanwhile, the Bank of Israel stressed that despite expectations of lower tax revenues next year, a cut in the growth forecast and the distribution of funds among coalition parties last week, it was still not concerned about the growing deficit. The bank’s research department says the government’s policy is still considered contractionary: “The deficit target was legislated last year and it does not look like Israel will exceed it. This is true even if there is some reduction in income due to changes in economic activity.”

On the other hand, the Bank of Israel is naturally not happy about showering coalition parties with money, most of which will not contribute to economic growth. A warning issued last week by the Ministry of Finance’s Budget Division that an uncontrolled division of coalition parties could harm Israel’s GDP in the future largely echoes previous reports from the central bank, which, for example, emphasized the importance of integrating ultra-.

The state budget to be approved this week is built on a baseline assumption of a very low budget deficit of 0.8-0.9% of GDP in 2023-2024. According to the latest forecast of the Ministry of Finance, the deficit will increase to 1.1% this year and to 1.35% at the end of next year. This is still small compared to market expectations. Analysts agree that the deficit will reach 3% of GDP.

Mizrahi Tefahot Chief Economist Ronen Menachem says the Bank of Israel will have to be on the lookout for a budget deficit in the coming months. “The government must adopt the state budget for 2023-2024 by the end of the month, and thus the transition period, during which state spending was limited to one-twelfth of the existing budget per month, will end. The more violations of the deficit target become apparent, the more difficult it will be for the Bank of Israel to reduce interest rates,” he says.

Finance Minister Betzalel Smotrych is at least sure that the anxiety is exaggerated. “The budget is still balanced, it corresponds to the spending ceiling that we set for ourselves, and we did not violate the budget framework and manage to maintain the framework we set,” he says. “The funds for the coalition parties slightly exceed the indicators of previous years, so in this respect we are at the same level.”

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