Political uncertainty could lead to further rate hikes, Bank of Israel official says

JERUSALEM (Reuters): Political uncertainty surrounding a highly-contested overhaul of Israel’s judiciary pushed the central bank to raise interest rates more than planned, and could lead to further monetary tightening, the bank’s deputy governor said on Monday.

Deputy Governor Andrew Abir told Reuters after the central bank raised its benchmark interest rate by another 25 basis points to 4.75% that political uncertainty had raised the risk premium on Israeli assets, weakened the currency, and fuelled inflation.

“The progress that we would have expected on getting inflation back into the target has been slower predominantly because of (the shekel’s) exchange rate and creation of the political uncertainty that we’ve seen over the last few months,” Abir said.

Israel’s government is trying to push through changes that would give politicians greater sway over selecting judges and limit the power of the Supreme Court to strike down legislation. The plan has sparked months of mass protests and warnings from leading economists as well as credit rating agencies.

Prime Minister Benjamin Netanyahu, under pressure at home and abroad, has agreed to delay the overhaul to try to negotiate a middle ground, and the focus has shifted to passing a state budget before an end-of-the-month deadline.

“We’ve probably had to do more monetary policy tightening than we had envisaged because of the political uncertainty leading to an increase in Israel’s risk premium, depreciation of the currency, and therefore inflation being higher,” Abir said.

At the outset of the tightening cycle which began in April 2022, the Bank of Israel had foreseen a peak of around 3% but has been gradually increasing as inflation stayed high.

Inflation in April stood at 5%, near a 14-year high, and well above the government’s 1-3% annual target range.

Should private consumption pick up and inflation remain “stubborn, staying up around 5%,” he said the central bank may decide to do more monetary tightening.

“I think all options are open,” he added.