Amid healthy economic growth, inflation rates are expected to return to normal sometime next year, Israeli economists believe.
Inflation rates in Israel reached 5.2% annually as of July, according to data released by the Central Bureau of Statistics. Though higher than expected, that figure is still well below the OECD average as measured by the consumer price index, which rose to 9.6% in May.
In response, the Bank of Israel on Monday announced it would be raising interest rates by 0.75%, marking the steepest such hike in 20 years. The key rate now stands at 2% and is forecasted by analysts to rise by another 0.5% in the fall.
Amir Yaron, the governor of the Bank of Israel, explained that the bank is determined to return inflation rates to normal. Speaking to Israel’s Channel 13 News, Yaron called the ongoing war in Ukraine a leading factor in runaway inflation rates.
“The war in Ukraine added fuel to the fire all over the world and was the reason that we accelerated the increases in interest rates,” he said.
Leading Israeli economists are optimistic, however, and foresee an end to high inflation both in Israel and around the globe in the near future.
“All indicators, not only in Israel, expect inflation rates to become ‘normal’ sometime again in 2023,” Prof. Benjamin Bental, principal researcher and Economics Policy Program chair at the Jerusalem-based Taub Center for Social Policy Studies, said.
“In the U.S., it’s a clear mixture of a monetary overhang – the economy is swamped with money after the COVID crisis – with the global supply chain and energy problems,” Bental said. “The expectation is that the overhang will be dissipated over the coming months. The supply chain issues have also started already sorting themselves out. What will happen with energy depends a lot on what happens in Europe and the war with Ukraine.”
Regarding fears of a potential recession, Bental said that market projections are currently pointed in the opposite direction, at least for the U.S. and Israel, whose economies are growing and where unemployment rates also remain quite low.
The main concern at the moment, Bental asserted, is Europe.
“It’s a combination of very extraordinary and very unfortunate events that are all very detrimental: the overhang of the pandemic with the supply chain issues, on top of the war in Ukraine and major disruptions in energy supplies,” he explained. “On top of all this, there is a drought, which causes huge problems in the river transportation system.”
If the situation in Europe further deteriorates that could cause a spillover economic effect that affects the entire world, he warned.
Other economists also expressed cautious optimism about rising costs and interest rates.
Professor Emeritus Alex Cukierman, who for 30 years was an economics professor at Tel Aviv University and taught at Reichman University, believes that supply chain issues – which have caused prices for many household goods to spike – are on the mend.
Many central banks around the world have increased interest rates in a bid to rein in runaway inflation.
Nevertheless, it will take time for such measures to cool overheated markets down.
“If the policy succeeds then I estimate that we’ll return to normal within a year or two, providing that there are no more surprises or unforeseen circumstances,” Cukierman, a former member of the Bank of Israel’s Monetary Policy Committee, said.
“We won’t see housing prices go down; however, we will see pricing increases decelerate,” he said. “New mortgages are much more expensive than they used to be in the past decade. In fact, the fact that rates were so low for so long is one of the reasons that the housing market reached a boiling point.”
Aside from raising interest rates, Cukierman also recommended other measures to curb runaway inflation, namely by regulating the price of basic goods. Tax rates for certain items could also be cut – at least temporarily – to reduce the burden of rising costs on the consumer.
“But I don’t think cutting taxes on everything is a favorable policy to keep in place over the long run,” he cautioned.
The story is written by Maya Margit and reprinted with permission from The Media Line