By Steven Scheer

JERUSALEM, (Reuters) – The Bank of Israel is likely to raise its short-term rates by a quarter of a point next week in an effort to curb rising inflation. This was partly due to low unemployment.

Reuters polled fourteen economists to determine that 11 of them predicted that the MPC, the central bank’s monetary-policy committee (MPC), would increase the benchmark rate by 0.6%. This will be in addition to the previous 0.35%. The forecasts of three other economists are for a stronger increase of 0.4 points to 0.75%.

Ofer Klein of Harel Insurance and Finance’s economics and research department stated, “In view of inflation, depreciation of Shekel and increase in interest rates around the globe, and despite the weakening growth figure,” that the Bank of Israel would hike its key rate by 0.25 percent.

The policymakers initiated a tightening process last month. They raised the rate from 0.1% to an all-time low. This was the first rate hike since 2018. It also marks the return of 0.15 points at the beginning of the COVID-19 pandemic.

Israel’s April inflation rate went up to 4%, a record high since 2011. This is above the government’s target of 1%-3% per year. It joins the United States and European central bank in tightening policies to relieve price pressure.

Analysts predict that inflation will rise to as high as 5% and then moderate.

Of course, Israel’s GDP contracted by 1.6% over the previous three months. Economists rejected the estimate as being misleading. Instead they said that Israel’s economy is robust and would grow 8.2% annually through 2021. According to the Bank of Israel, there will be 5.5% growth in economic activity by 2022.

Israel’s April jobless rate was 3.1%, down from 3.4% in March. This indicates a tight labour market as well as concerns about an increase in wage inflation.

Accordingly, analysts think that an increase of 0.4% in key interest rate is possible.

According to Gil Bufman, Bank Leumi’s chief economist, rates will be raised by the Bank of Israel to “get to neutrality (if not tighter)” as soon as possible.

Michel Nies, Citi economist, stated that he could argue for a 40-basis point increase and prefer the 25 basis points increment. This is because it might allow the Bank of Israel to have more options at the next meeting.

Most analysts expect that rates will reach 2% within the next year.

According to the bank’s economists, the inflation rate will rise by 3.1% and the key rate will increase to 1.5% in the next year. Amir Yaron, chief of the central bank, stated that he expects Israel to be slower than other countries. The pace at which rate increases are dependent upon future growth and inflation data.

A weaker shekel that has appreciated 8% versus the dollar this year is one factor favoring a small increase. Analysts fear that an increase in the rate could cause a rapid strengthening of Israel’s currency, which would also impact exports.

In the week just ended, the shekel climbed to 3.35 USD from 3.47.