By Steven Scheer

JERUSALEM, (Reuters) – Israel’s central banks should be ready to increase interest rates or reduce foreign exchange interventions if inflation pressures escalate further, according to the International Monetary Fund on Sunday.

Following its annual visit to Israel, the IMF released a statement stating that there is room for Israel’s government and IMF staff to increase taxes but also advise more efficient state spending.

Israel’s official inflation rate in 2021 was 2.8%. This is well within the 1-3% target. But, according to IMF, rising prices for services, high rates of capacity utilization and wage increases in certain sectors are “incipient signs that underlying inflationary pressures”

The IMF stated that “If the underlying upward pressures become greater, the Bank of Israel should not hesitate to tighten its monetary policy.”

Iva Krasteva Petrova (IMF mission chief for Israel), told reporters that although inflation is below target, there’s no reason to tighten monetary policy right now. But, the central bank must remain vigilant. High housing prices were also a concern.

The IMF also stated that foreign exchange purchases must be tapered off to allow market forces to determine the shekel. Future purchases can still take place if appreciation pressures or rising inflation expectations threaten to lower the target range.

According to the central bank, it has stated that it does not worry about inflation and therefore allows for patience when implementing monetary policy.

IMF praises the management of COVID-19 and Israel’s goal to lower its debt over the medium-term.

However, it cautioned that planned consolidation would require spending reductions which could prove difficult considering the already low level of civil spending. It said that “reviewing public spending efficiency” would prove useful.

According to the IMF, there is potential for the government to raise tax revenue.

The IMF anticipates strong economic growth in Israel for 2022 after a 6.5% increase in 2021. This will be supported by investment, consumer spending and exports.

According to the report, new COVID variations could pose a risk to economic growth. Tightening global financial conditions may also be detrimental for stock markets. This could lead lower revenue from government and increase capital costs.