Strong GDP growth and inflation data seen in Israel are prompting another bps of tightening the national interest rate through the rest of 2022
- Israel’s annual inflation as well as economic growth topped all forecasts, as prices accelerated to their highest levels since October 2008, adding urgency to Israel Central Bank’s (ICB) cycle of interest-rate increases lately.
- Spurred by a rise in the cost of fresh fruit, transportation and housing, price indicators jumped in July to an annual rate of 5.2% from the previous annual rate of 4.4% in June. On a monthly basis, price growth reached 1.1% in July, nearly twice the median prediction of analysts.
- Although inflation has been “stuck” above the Israeli government target-range of 1% to 3% since the start of 2022, it is still far below levels in other developed countries.
- For example, the US and UK are grappling with an annual inflation rate of 8.5% and 10.1%, respectively.
- At the same time, surprisingly, Israel’s GDP has grown in the second quarter of 2022 to an annualized rate of 6.8%, versus an expected 2.8% in a Reuters poll and after a revised downward contraction of 2.7% in the prior three months.
- Compared to the second quarter of 2021, Israel’s GDP has grown an impressive 7.4% – so far the highest growth recorded in any OECD country (Portugal 6.9%, Spain 6.3%, Canada 4.8%, USA 1.6%, and Germany 1.5%).
- The Israeli Central Bureau of Statistics explains the strong growth in the second quarter, as a return to post-Covid routine which is driven by recoveries in sectors such as: Tourism, Aviation, Hospitality, Restaurant and Transportation services.
- The surprising figures will most likely shape views on how aggressively the ICB may have to raise national interest rate during the following months.
- A combination of high inflation rates and strong growth in GDP might provide the ICB with legitimacy to raise interest rate by 75 bps.
- The ICB has already made efforts to “get-ahead of inflation” by delivering several interest rate increases, including the largest since 2011, as well as increasing the pace of monetary tightening with every raise.
- With prices rapidly rising and discontent growing among Israeli citizens, the cost of living is Israel has become one of the main issues for politicians, who are preparing for the upcoming general elections on Nov. 1st.
