With Israel’s economy growing at a fast pace and rising consumer prices due to global inflation, Israel’s central bank has announced that it will gradually start raising interest rates. The record low level of 0.1%, which has remained constant for 15 Central Bank meetings, will start moving upward.
The Central Bank cited “continued strong activity” as well as increasing costs for goods, services, and housing as reasons to increase the rate. In a statement, the Central Bank declared, “In the coming months, conditions will allow for the start of a gradual process of raising the interest rate in line with the path of inflation and the pace of growth and employment,” according to Times of Israel.
The interest rate was cut at the beginning of the COVID-19 pandemic when it was reduced from 0.25 to 0.1. Over the past two years, Israel’s economy has not only weathered the pandemic crisis but has grown, with record-breaking fundraising among startups. Israel’s GDP rose an astounding 8.1% in 2021
It presumably has become clear to the Central Bank that the emergency measures to preserve the economy during the global crisis are no longer needed, and could be contributing to inflation that is eating away at consumer spending power. The Central Bank stated that the rise in the interest rate would “continue supporting the achievement of monetary policy goals and…ensure the proper functioning of financial markets.”
Inflation is rising. The Central Bank set a limit on inflation at 3%, but Israel’s inflation rate exceeded this to rise to 3.1% in January. In addition, the 8.1% GDP rise shows Israel’s highest economic growth rate in 21 years. This is obviously a positive, but it also indicates that lowering interest rates to avoid an economic crisis is not a measure that is still required.
In addition to the rise in inflation, housing prices rose 11.3% in a year. The Central Bank’s policy of increasing interest rates will help Israel’s economy grow at a more sustainable pace and will keep housing and consumer prices rising beyond the budgets of the average Israeli consumer.
As Israeli employees return to work, the unemployment rate is declining and dipped 5.6% in January. This and other indications of economic strength make the policy of keeping interest rates artificially low no longer relevant.
Israel’s economic growth is definitely terrific news for people who hold Israeli investments. However, this dramatic development, coupled with interest rates intentionally held at a low level, has been a contributing factor to skyrocketing consumer prices and a reduction in purchasing power of average Israelis.
To help Israel’s economy grow at a more manageable rate in a way that will enable consumers to participate in this growth, the effect of this adjustment in interest rates should ultimately be a positive for Israeli companies, as consumers are free to spend more, and on Israel’s economy as a whole.
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Israel’s Central Bank’s decision to raise interest rates is an indication of the strength of the economy despite the challenges posed by the pandemic. Now is a good time to invest in Israel and ETFs are s6olid Israeli investments. which provides a broad exposure to Israel’s economy.
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