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Israel's central bank will probably stick with the fastest pace of interest-rate hikes in two decades as part of a monetary tightening cycle that may extend well into next year.
With inflation above target and the shekel at the weakest in over two years, policy makers meeting this week are set for an unprecedented fifth straight increase in borrowing costs, according to all economists surveyed by Bloomberg.
Most analysts see the benchmark rising by 75 basis points to 2.75%. As recently as in July, the central bank's research department predicted the key rate will only reach that level in the second quarter of 2023.
The decision on Monday will show the Bank of Israel trying to remain in sync with its counterparts in the US by adding to almost two percentage points of hikes since April that already took the benchmark to the highest in a decade.
The Israeli central bank has accelerated the pace of monetary tightening every time it raised rates this year, hiking by 75 basis points at its most recent decision in August.
Governor Amir Yaron still has a long way to go before delivering on his goal of bringing inflation-adjusted interest rates to "around zero, or slightly above it." Israel's one-year currency swaps suggest investors see the base rate rising to around 3.7% a year from now.
Israeli consumer prices have shown signs of cooling but remain well above the government's 1% to 3% target range. Following a decline in the global cost of oil and Israel's temporary cut in the excise duty on fuel, inflation slowed more than anticipated in August to an annual 4.6%.
"The drop in the CPI in August will not stop the increase in interest rates," economists at Bank Hapoalim said in a report. "The inflation environment in Israel is still high, and the tight labor market is expected to continue to put pressure on wages and inflation."
Alongside the rate announcement on Monday, the central bank's research team will issue updated economic forecasts and Yaron will speak at a news conference to explain the decision.
The department's previous outlook, published in July, projected gross domestic product expanding 5% in 2022 and 3.5% next year. Price growth was seen at 4.5% this year before slowing to within the government's target and reaching 2.4% in 2023.
On top of wage pressures and increases in housing prices, currency depreciation is also becoming a concern. The shekel, which is closely correlated with the performance of US equities, has dropped as American stocks suffered their worst monthly rout since March 2020.
After weakening for much of the first half of the year, the Israeli currency rallied between July and mid-August but has since slumped sharply. It's down more than 6% against the dollar over the past month, faring worse than Argentina's peso in that period.
A weaker currency threatens to add to price pressures by making imported goods more costly.
"The risk is that if the recent FX weakness extends, this could imply that inflation will remain above the Bank of Israel's target for longer," Goldman Sachs Group Inc. analysts including Clemens Grafe said in a report.
"Reflecting these developments, in the near-term and in the current market environment we continue to think that external developments will remain the main drivers for monetary policy and the rates market in Israel," they said.
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