The Bank of Israel will not be aggressive in raising rates once it starts tightening policy in the coming months since inflation is expected to remain under control, deputy governor Andrew Abir said on Tuesday.
Follow Israel Hayom on Facebook, Twitter, and Instagram
The central bank on Monday held its benchmark rate at 0.1% for a 15th straight decision but signaled it would likely start raising rates soon amid robust economic growth. Last month, it had said it would continue to conduct an accommodative monetary policy for a prolonged time.
Abir said the current rate is no longer appropriate for an economy that grew 8.1% in 2021 and rate hikes would be the next step after ending its quantitative easing programs of government bond purchases late last year.
"Now, we are just moving into the next step of our monetary policy and signaling to the market that we will start the slow, gradual process of adjusting interest rates. And it will probably start in the next couple of months," Abir said in an interview with Reuters. "We are not talking about aggressive tightening."
Analysts say an increase could come as early as the next decision on April 11 and the rate would reach 1% in 2023. Abir said it was too soon to pinpoint a date, especially given market uncertainty over tensions between Russia and Ukraine, but that the bank would not wait for long.
"We think the conditions will be ripe in the next few months to be able to start that process of raising the interest rate," he said.
Israel's inflation rate reached 3.1% in January, breaking above a 1-3% target for the first time since 2011. Yet, Abir said the rate should move back to within the target this year.
"Inflation here is considerably lower than virtually all the other OECD countries so this has allowed us to be more patient," he said, noting that the current interest rate was more appropriate five or six years ago when inflation was below 1% and even negative.
The central bank, he added, doesn't need to move quickly despite a strong economy and employment levels close to pre-pandemic highs since wages are not growing quickly. However, policymakers were monitoring wages closely, he said.
More competition in the economy that aims to reduce the cost of living was a factor keeping inflation under control, Abir said, while Israel was less impacted by global spikes in energy prices since most of its natural gas supply contracts are on long-term deals.
"We haven't had a price shock in electricity that many other countries have suffered," he said.
One concern for the Bank of Israel has been the strong shekel. Abir said he wasn't too worried that a rate hike would further strengthen the currency.
Interest rate differentials, though, are of secondary importance to the market than movements in global stocks markets, in which the shekel has weakened 4% this year versus the dollar on drops in share indexes, Abir said.
The central projects 5.5% growth in 2022. Abir said he was looking to see if a preliminary fourth-quarter growth estimate of an annualized 16.6% would be revised as in the past.
Still, "we think we are going to be growing at a healthy tick in 2022 and 2023," Abir said. "We certainly don't expect it to be 8-9% but it will be strong growth."
Subscribe to Israel Hayom's daily newsletter and never miss our top stories!
