Forecasts split on Bank of Israel benchmark rate rise

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By Steven Scheer

JERUSALEM (Reuters) - The Bank of Israel is expected to raise short-term interest rates for a sixth straight time next week, a Reuters poll shows, although analysts are split over the size of the rise given the need to balance high inflation with slowing economic growth.

Of 15 economists polled by Reuters, 9 forecast that the monetary policy committee (MPC) will raise the benchmark rate to 3.25%, its highest level since September 2011, from 2.75% when its decision is announced on Monday.

Six others, who said the central bank has been more aggressive than expected at every meeting, said they anticipated a 0.75 percentage point increase to 3.5%.

In the rate hike cycle that followed the 2008 financial crisis, the key rate peaked at 3.25% before moving back to 0.1% in 2015 where it largely stayed until this year.

In early October, the central bank had raised its rate by three-quarters of a point for a second straight meeting, citing its determination to move inflation back to a 1-3% annual target by "front loading" rate increases.

Israel's inflation reached a 14-year high of 5.2% in July and stood at 5.1% in October, high for the country but below that in the United States and Europe.

Economic growth in the third quarter slowed to a 2.1% annualised rate from the prior three months, down from 7.3% growth in the second quarter.

The central bank expects 6% growth in 2022 and 3% next year -- a level economists believe is ambitious given the aggressive rate hike cycle since April.

"It can be 0.5 or 0.75 basis points. The chances are equal," said Ofer Klein, head of economics and research at Harel Insurance and Finance.

"From the one side inflation is still high, from the other the economy has started to cool," added Alex Zabezhinsky, chief economist at the Meitav Dash brokerage.

At best, economists expect a soft landing. At worst they anticipate stagflation where inflation remains high while the economy is stagnant or grows slowly.

Those who expect a half-point rise believe it addresses inflation, while taking into account economic uncertainty.

Last month, Governor Amir Yaron told Reuters he saw rates peaking at "3 plus percent" in a signal the tightening cycle was close to running its course, and analysts believed 3.5% could be the peak. Now, economists see a 4% ceiling.

"The dataprints this week appear to us sufficient to revise the terminal rate forecast back up to 4%," said Citi economist Michel Nies, adding: "We see the balance 55/45 in favour of a 75 basis points hike (on Monday)".

"The Bank of Israel's tendency this year has been to surprise to the upside," Nies said.