Is another Israel interest rate increase coming soon?

The idea underlying an interest rate increase is to make loans more expensive - in so doing, the hope is that the population will borrow less

 Israeli money bills. (photo credit: PIXABAY)
Israeli money bills.
(photo credit: PIXABAY)

Batten down the hatches and bust out your budgeting equipment.

According to the Central Bureau of Statistics on Friday, Israel’s Consumer Price Index (CPI) increased by 0.4% in June. While it is lower than the 0.5% economists expected, it is still sour news for anyone hoping to see the cost of living level out any time soon.

The latest reported increase brings Israel’s inflation over the past year to 4.4%. While Israel is definitely doing well compared to countries such as the US and UK (both of which boast an inflation rate of around 9%), Italy (8.5%), and Germany (7.6%), its inflation rate is still a substantial deviation from the Bank of Israel’s (BoI) target range of 1-3%.

As such, there is speculation that the BoI might repeat what it attempted in April in order to level out the economy: increase its interest rate.

Why an interest rate increase?

The idea underlying an interest rate increase is to make loans more expensive - in so doing, the hope is that the population will borrow less. As a result, less money is fed into the economy, giving it a chance to equilibrate.

Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)

An interest rate increase may help because loaning is one of the primary culprits fingered by economists for Israel's high inflation. In response to the outbreak of COVID-19, the Israeli government was eager to supply its citizens with very manageable loans, in order to prevent the economy from tanking as the entire business sector was flipped on its head.

However, that initially successful knee-jerk reaction to the pandemic has left behind a lot of extra money in circulation as the worst of COVID-19 has waned.

“The original economic problem – the COVID recession – has almost completely evaporated, but the major infusion of money is still around and it is causing inflation.”

Prof. Dan Ben-David

“The original economic problem – the COVID recession – has almost completely evaporated, but the major infusion of money is still around and it is causing inflation,” said Prof. Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and an economist at Tel Aviv University, following the BoI’s decision to raise the interest rate in April.

He noted that supply chain misfirings have added to the mix, supplying the country with “all of the ingredients for rising prices,” and indeed, prices around the country are certainly on the way up. The housing market continues to surge, with property prices reaching such heights that several protests have sprung up around the country.

In Pardes Hana, a small group of a dozen or so tents has now occupied a park near the main road for over a month, decorated with signs condemning the absurd price of real estate. 

“The goal is, first and foremost, to stop this madness," said one of the group’s residents. “I could call my mom and ask her to send me money in order to make rent, she has money - but that’s hers. Why should I be in a situation that requires me to take her money to pay rent?”