Migrating starlings fly across the sky, in southern Israel December 28, 2015.
Migrating starlings fly across the sky, in southern Israel December 28, 2015. Reuters / Amir Cohen

Israel's economy grew at its fastest pace in 21 years in 2021 as consumer spending, exports and investment rebounded with double-digit gains following a pandemic-stifled 2020, raising the spectre of the central bank raising interest rates soon.

The economy grew 8.1% last year, the Central Bureau of Statistics said on Wednesday, well above the Bank of Israel's forecast of 6.5% and a sharp rebound from a 2.2% contraction in 2020.

The bureau noted growth in Israel last year was one of the strongest globally and compared with an OECD average of 5.3%.

The central bank projects growth of 5.5% in 2022. It has said it is in no rush to start raising short-term interest rates but that faster-than-expected growth and rising inflation could prod policymakers to join peers in the United States and Europe in hiking rates.

Israel's benchmark rate stands at 0.1%.

"These are very robust (GDP) numbers reflecting strong economic activity towards the end of 2021, which is supportive for a rate hike, most likely on April 11th," said Leader Capital Markets chief economist Jonathan Katz.

The next rate decision is due on Monday.

On Tuesday, the bureau said the annual inflation rate rose to 3.1% in January - breaking above the government's 1-3% target range for the first time in more than a decade.

Like most countries, Israel in 2020 was hurt by the pandemic and a series of lockdowns to contain the spread of COVID-19. But in 2021, a rapid vaccination rollout allowed a reopening of much of the economy apart from the tourism sector.

Israel has only recently started to allow foreign tourists to enter the country again.

Consumer spending, which accounts for half of economic activity, rose by close to 12% in 2021, while exports - another key growth driver - gained nearly 14% despite a stronger shekel currency, while investment in fixed assets was up 10.5%.

In the fourth quarter of 2021, gross domestic product grew an annualised 16.6% in from the prior three months, according to a preliminary estimate, above the 5% growth anticipated in a Reuters poll of economists.

Private spending jumped 19.2%, while exports surged 26.3% and investment grew 14.1%. Government spending and imports also rose sharply during the last three months of the year.

Third-quarter GDP was revised to annualised growth of 6.7% from a prior 2.7% rate.

Growth in 2021 was the fastest in Israel since an 8.9% pace in 2000.

The shekel gained 1% against the dollar, while Tel Aviv shares were also up 1%.