By Steven Scheer and Ari Rabinovitch

JERUSALEM (Reuters) -The Bank of Israel left short-term borrowing rates unchanged on Monday for the first time since early 2022, as expected, but warned that rates could be hiked further if inflation picked up again.

Governor Amir Yaron said that rates would remain high for some time. He also cautioned that legislation on a highly-disputed bill that is part of the government’s judicial overhaul plan, and which is being advanced in parliament on Monday, will carry an economic price.

The central bank kept its benchmark rate at 4.75% – its highest level since late 2006. It had raised rates 10 straight times in an aggressive tightening cycle that has taken the rate from 0.1% last April.

Of 19 economists polled by Reuters, 14 had expected no rates move, although analysts are split as to whether the tightening cycle has ended.

Similarly, the U.S. Federal Reserve held its policy rate steady last month but is widely expected to raise rates later in July.

Yaron himself said much depends on inflation, which eased to 4.6% in May from 5% in April, well above the government’s 1%-3% annual target range. The bank’s staff projected inflation would stand at 3.0% in the next four quarters and end 2024 at 2.4%.

“If we see the environment does not converge in the way we thought … we won’t hesitate to keep raising the interest rate,” Yaron said at a news conference. “We estimate that we will need to keep the interest rate at a fairly high level for a while.”

At the outset of the rate hike cycle, policymakers believed a rate of just above 3% would suffice to rein in prices. But a combination of supply chain issues, high demand and a more than 7% depreciation of the shekel versus the dollar mean inflation has not declined as fast as anticipated.

The shekel recovered losses of 0.5% versus the dollar after the decision and Yaron’s comments on more possible hikes.

The central bank has warned for months that the shekel was taking a hit from the government’s handling of its judicial overhaul. Yaron said that an “excess depreciation” of the shekel had contributed up to 1.5 percentage points to inflation.

The central bank has relied on interest rates to rein in inflation and has so far kept away from other tools, like intervening in the foreign exchange market.

Goldman Sach analyst Tadas Gedminas said the monetary panel balanced concerns over a weaker shekel by maintaining a “hawkish bias.” He believes that by the next rate decision on Sept. 4 inflation could ease to below 4%. “We think that inflation has now peaked and … that it is on track to decline gradually over the remainder of the year,” he added.

Yaron finishes his term at the end of 2023. He said he will decide whether to bid for a second five-year term around the Jewish holidays in September-October. It is unclear whether Prime Minister Benjamin Netanyahu will ask him to stay on.

The central bank’s economists foresee the key rate at 4.75% or 5% in the next year. They also forecast economic growth of 3% in both 2023 and 2024 – down from 6.5% last year – while Yaron noted that a tight jobs market persists.

The bank said growth could be threatened if the contested Israeli judicial reforms caused an adverse reaction in Israeli financial markets.

(Reporting by Steven Scheer and Ari Rabinovitch; Editing by Toby Chopra, Emelia Sithole-Matarise and Christina Fincher)

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