Bank of Israel raises interest rate to highest since 2006

The Bank of Israel hiked benchmark interest rates to their highest level since 2006 on Monday, citing high inflation, and said upcoming data would determine whether it raised them further.

The central bank lifted the key rate for the 10th policy meeting in a row, to 4.75 percent from 4.5 percent. All 15 economists polled by Reuters had projected the move.

Despite the steep tightening cycle, Israel's annual inflation rate stood at 5 percent in April, near a 14-year high and well above the government's 1-3 percent target range.

"Economic activity in Israel is at a high level, and is accompanied by a tight labour market, although there is some moderation in a number of indicators," the Bank of Israel said in comments on the policy decision. "Inflation is broad and remains high."

The future interest rate path would be determined by upcoming economic growth and inflation data, it added.

A weak shekel, stemming from a drop in foreign inflows due to uncertainty over a judicial overhaul planned by the government that has prompted sharp criticism at home and abroad, has partly contributed to the high inflation rate.

Since the prior rates decision in early April, the shekel weakened 1.5 percent against the dollar. It was 0.3 percent lower against the dollar after Monday's decision.

Israel's economy grew at an annualised 2.5 percent in the first quarter from the prior three months, and growth in 2023 is expected to ease to 2.5 percent from 6.5 percent last year.