Inflation rising in Israel

The Bank of Israel has raised its benchmark interest rate to 4.25% from 3.75%, its eighth consecutive increase since April 2021. The hike is the first time it has surpassed a move by the US Federal Reserve since it started raising borrowing costs. The bank said exchange rates had been characterised by “considerable volatility” and that it was “determined to bring price growth back into its target range” of 1%-3%. Higher household energy costs and housing inflation were the biggest drivers of price increases in January.

Political turbulence

The rate hike comes amid a bout of political turbulence in Israel, which has helped make the shekel the worst-performing currency in the Middle East this month, after the Lebanese pound. Prime Minister Benjamin Netanyahu and allies are looking to make it easier for the state to appoint judges and limit the Supreme Court’s authority to strike down legislation, a proposal that has triggered weeks of protests among Israelis and prompted a high-profile resignation of a member of the central bank’s monetary committee. This has a negative impact on business confidence (and possibly consumer confidence).

IB Economics Internal Assessment (IA) Commentary

In the IA, I’d talk about the effects (costs) of inflation using an AD/AS diagram to show it. Then explain how higher benchmark interest rates can lead to an increase in market interest rates, which theoretically will bring AD down (due to lower consumption and investments). It’s also important to note that “higher energy costs” can lead to cost-push inflation and that monetary policy is not the most useful tool to curb that kind of inflation. More specifically, in Israel’s case, the political turbulence seems to be the major reason behind the weakening currency (which adds to inflation), and thus in this case a solution to the above mentioned political problems is much more likely to be effective than an economic one. You can use intervention as a key concept.

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