Huge Economic Upswing Adds to Inflation Bump for Bank of Israel
(Bloomberg) -- Israel’s economic gains topped all forecasts and inflation unexpectedly quickened, raising the stakes for the central bank as it prepares to extend its longest cycle of interest-rate increases in decades.
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In a surprise acceleration, gross domestic product surged a seasonally adjusted, annualized 5.8% in the fourth quarter, according to data released on Thursday. That’s almost triple the pace in the prior three months — which was revised to 2.1% — and faster than any prediction in a Bloomberg survey.
Private consumption was up more than 10% and investment grew 4.8%.
Inflation climbed an annual 5.4% last month, compared with 5.3% in December — already a 15-year high — according to figures released by the Central Bureau of Statistics on Wednesday.
The upswing in activity and prices could mean the central bank will act with more urgency after starting to raise borrowing costs in smaller increments from November. It’s set to announce its next decision on Monday, with all analysts predicting an increase of a quarter percentage point to 4%.
Inflation has been above the official target range of 1%-3% for over a year, prompting the Bank of Israel to raise rates to their highest level since 2008.
The higher costs of electricity, cigarettes and tobacco as well as housing services were among the biggest contributors to last month’s pickup in prices. Monthly inflation also came in faster than forecast and was at 0.3%, unchanged from December.
“Even though it is evident that the local inflation environment is higher than what was priced in the market, we believe this is due to the way current expectations in the markets — particularly in the interest-rate markets — express some concerns over a potential inflationary outbreak, rather than a reflection of the inflationary environment alone,” Yonie Fanning, market economist for Mizrahi-Tefahot, said in a note to clients.
Since the central bank’s last meeting at the start of the year, the political backlash against the government’s plans to reshape the judiciary has increasingly become a drag on sentiment, stoking a depreciation in the shekel that could make imports more expensive.
The Israeli currency is down about 0.6% against the dollar so far in 2023, adding to last year’s loss of nearly 12%.
‘Push Factor’
“With the exchange rate turning from a pull to a push factor for inflation, we think it will be much harder for the Bank of Israel to bring inflation back to its target,” Goldman Sachs Group Inc. economists including Clemens Grafe said in a report before the data release.
“The ongoing weakness of the shekel also raises risks that the central bank will look to deliver a more hawkish message at the next MPC meeting,” Goldman’s economists said.
The central bank’s research team last updated its economic forecasts in January, projecting much weaker economic growth and slower inflation ahead.
It estimated Israel’s GDP will expand 2.8% in 2023, down from 6.5% last year. Inflation in the coming four quarters was seen at 3%.
Bank of Israel Governor Amir Yaron said in an interview last month that price growth was on track for a deceleration soon.
“If we’re looking at the six-month inflation, we are seeing some elements of moderation,” he said. “This is why we believe that after February, toward the end of the first quarter, we will see inflation in Israel starting to progressively go down.”
--With assistance from Harumi Ichikura and Alisa Odenheimer.
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