Israel finance minister fends off cabinet criticism over central bank

Israel’s finance minister has vowed to maintain the independence of the country’s central bank after a cabinet colleague criticised it for raising interest rates.

Bezalel Smotrich, an ultranationalist who called himself a “proud homophobe” and heads the Religious Zionist party, said the independence of the Bank of Israel was “fundamental” for the development of the economy and warned against “populist statements” that threaten it.

The shekel was down 1.7 per cent against the dollar on Tuesday in the wake of the spat, which coincided with a bitter clash over a judicial overhaul being advanced by Benjamin Netanyahu’s hardline government that has sparked weeks of mass protests and concern from Israel’s allies.

Smotrich’s comments came after Eli Cohen, Israel’s foreign minister, said there was “no justification” for the bank’s decision to raise its benchmark rate to 4.25 per cent on Monday, the eighth time it has increased rates since April.

Israeli inflation hit a 15-year-high of 5.4 per cent last month, above the central bank’s target of between 1 per cent and 3 per cent.

However, Cohen said inflation was moderating and that the bank’s latest rate rise “continues the mistreatment of mortgage holders”. He also called on the finance minister to “formulate a framework with the Bank of Israel governor to end the interest rate hikes”.

Smotrich acknowledged that rate increases were making life difficult for many households. But he said the government would fight the rising cost of living through fiscal policy and, “with God’s help”, the coalition would draw up a budget that would combine infrastructure investment with a relief package.

Cohen’s intervention was also criticised by Amir Yaron, the head of Israel’s central bank, who advised the foreign minister to “delve into the data”.

“It is desirable of course, certainly as foreign minister, that he understands the importance of an independent central bank,” said Yaron. “In every country in which there was damage to the central bank, we know what the end result was.”

The squabble over the central bank’s independence came as Israel’s parliament voted on the first batch of judicial changes being pushed by Netanyahu’s coalition.

Government officials said the changes were needed to rein in an overly activist judiciary. But critics, which include two former central bank governors, numerous economists and executives from Israel’s crucial tech sector, have warned that the changes would undermine democracy, damage minority protections, foster corruption and weaken the economy.

Israel’s economic output grew 6.5 per cent last year, according to the country’s statistics office, and Moshe Gafni, head of the ultra-Orthodox United Torah Judaism party, said on Monday that “any attempt” to link the dispute over the judicial overhaul to an economic hit was “politicised”.

But as the battle over the judiciary has intensified, bankers and tech executives have begun to warn of the risks of capital flight.

This week, the US venture capital group Bessemer Venture Partners — which has invested about $1.5bn in Israeli companies — suggested that the Israeli start-ups it had backed should limit their short-term exposure to the shekel and keep their dollar balances in US accounts.