The Bank of Israel building is seen in Jerusalem June 16, 2020.
The Bank of Israel building is seen in Jerusalem June 16, 2020. Reuters / RONEN ZVULUN

The Bank of Israel escalated its battle against inflation on Monday, raising its benchmark interest rate by a half percentage point, and signalled no sign of stopping despite an uncertain political environment.

The central bank lifted its key rate to 1.25% -- the highest level since 2013 and the most aggressive move since 2011 -- from 0.75%, its third straight increase that follows similar moves from the U.S. Federal Reserve and others.

Policymakers began the tightening cycle in April, raising the rate from an all time low of 0.1%.

Israel's annual inflation rate reached a new 11-year high of 4.1% in May, well above the government's 1-3% annual target range, while the jobless rate dipped to 3.0%, raising concerns of further wage pressures.

The central bank's economists expect inflation to reach a 4.5% rate in 2022 before moderating to 2.4% next year, with the key interest rate projected to peak at 2.75% in the second quarter of 2023.

"We are determined to return the inflation rate to within the target," Bank of Israel Governor Amir Yaron told a news conference.

Asked whether increases of a half-point or more would continue in subsequent decisions to reach the 2.75% forecast, Yaron was noncommittal, saying local and global data would determine the pace of coming hikes.

"Governor Yaron sounded very hawkish," said Leader Capital Markets Chief Economist Jonathan Katz, adding the Bank of Israel is heavily influenced by the Fed and other central banks. "It is very likely we will reach 2.75% before the second quarter of 2023."

Yaron also cautioned about the potential fallout from the demise of Israel's government last week, but said the country's economy has proven resilient during repeated election cycles.

Parliament voted last Thursday to dissolve itself and hold a new election on Nov. 1, the fifth in less than four years.

The campaign, Yaron said, will not prevent more rate hikes.

"The Bank of Israel determines its monetary policy independently and disconnected from political developments. We look at and examine the data professionally to achieve our goals," he said.

He called on the next government to quickly pass a 2023 budget and make needed economic reforms that have been stalled.

All 15 economists polled by Reuters had said they expected the monetary policy committee to raise rates, 14 of them predicting a 0.5 point increase while one projected a 0.25 point rise.

The bank's staff also trimmed its 2022 Israeli economic growth estimate to 5% from 5.5% and its 2023 forecast to 3.5% from 4%.

The shekel appreciated to 3.50 per dollar after the decision from 3.51.