The decision of the Bank of Israel's monetary committee to raise the interest rate was made primarily because of signs of economic uncertainty. Contrary to early estimates, the core inflation in this delicate economy is relatively high compared to the inflation target the government had set.
The data was shown in the January index, which in past years was traditionally low, but the index published rose at a higher rate than expected at 0.3% Also, the impressive growth figures in 2022 of 6.5% (despite growth of only 5.8% in the fourth quarter of 2022) show that private consumption hasn't yet moderated. This consumer data is linked to employment data, and unemployment is rising.
Two other factors influenced the decision: The judicial reform that passed a first reading last week and the state budget for 2023/24 that was approved by the government.
According to all the experts, the judicial reform will lead to damage to the economy, the main and immediate of which is the lowering of the credit rating.
Tel Aviv Stock Exchange lags behind major US stock exchanges
It's hard to argue with the data: The Tel Aviv Stock Exchange lags behind by at least 10% in terms of performance compared to the three major US stock exchanges.
The credit rating companies Moody's and S&P have already expressed their concerns. Lowering the credit rating will increase the cost of raising capital and will also indirectly lead to a further increase in interest rates. Against this backdrop, it's possible to understand the depreciation of the shekel against the dollar by about 5% within a month.
The one who pays for all this is the common citizen. Finance Minister Bezalel Smotrich can claim all he wants that reforming the legal system will improve democracy and strengthen the economy, but it's very difficult to argue with the numbers.
As has been shown amid all this uncertainty, the interest rate increased and may continue to increase along with the declines in the stock market. The interest rate increase for the eighth time in a row from April 2022 will severely harm people who hold mortgages.
A household that received a mortgage of one million shekels a year ago is already forced to pay back an additional NIS 1,000 per month or NIS 12,000 per year on the prime interest component alone. This is a very heavy blow that weighs even more on the cost of living.
That's why it's no wonder that the banks, led by Discount, wanted to strike with the goal to make it easier for borrowers to repay mortgages and defer payments for several months.