Bank of Israel interest rate increases by an additional 0.5%

A further increase in the interest rate may reduce the effects of inflation, but it will have a negative impact on the recipients of loans and mortgages.

 The Bank of Israel building is seen in Jerusalem June 16, 2020. Picture taken June 16, 2020.  (photo credit: REUTERS/RONEN ZVULUN/FILE PHOTO)
The Bank of Israel building is seen in Jerusalem June 16, 2020. Picture taken June 16, 2020.
(photo credit: REUTERS/RONEN ZVULUN/FILE PHOTO)

The Bank of Israel interest rate increased by an additional 0.5% on Monday, with an announcement on the increase set to be made at a media conference to be held by Governor Prof. Amir Yaron, according to Maariv.

The interest rate increase is the first and most significant economic step for 2023, most economic analysts estimate that by the end of the year the interest rate will increase by an additional 0.25%-0.5% and will reach more than 4% per year.

The macroeconomic data, primarily the employment and consumption data, indicate that inflation is not decreasing. The governor is also afraid of the consequences of the wage agreements expected in January in the public sector and the agreements with the political parties involving the expansion of the budget framework for 2023 by at least NIS 30 billion.

A further increase in the interest rate may reduce the effects of inflation, but it will have a negative impact on the recipients of loans and mortgages. an average mortgage of about one million shekels became more expensive by 700 shekels per month from April 2022, and this is for the prime component only.

A total increase of NIS 850 since last year

Another increase in the interest rate will increase the monthly repayment by NIS 150 and in total an increase of NIS 850 since the interest rate was raised for the first time last year.

The increase in repayment concerns only the prime interest component (the variable interest rate) which is about 40% of the loan, the component of indexation must also be added to the equation, which increased from April 2022 by an additional 2.5%.

"It would be a grave error on the part of the Bank of Israel if the interest rate were to rise again. We must wait for the new Minister of Finance Bezalel Smotrich to formulate a joint and broad plan to curb inflation," Uriel Lin, President of the Chambers of Commerce, said.

"The interest rate hikes severely harm tens of thousands of businesses and hundreds of thousands of households, it will be passed on to consumers and add to the cost of living."

"The interest rate hikes severely harm tens of thousands of businesses and hundreds of thousands of households, it will be passed on to consumers and add to the cost of living."

President of the Chambers of Commerce Uriel Lin

Bank Hapoalim announced on Sunday that it will absorb the increase in interest rates for young couples who have bought their first apartment and are having trouble repaying their mortgage. The move is relevant to more than ten thousand customers. The relevant customers will receive an automatic notification from the bank.

"As a bank that leads the banking system, we made a decision to go out in a proactive and unprecedented move," Bank Hapoalim CEO Dov Kotler said. 

Inflation in Israel

The heavy inflation has led the central bank to increase the interest rate in the hope that a steeper rate will lead to less borrowing, which would in turn lead to less inflation. However, a steeper interest rate may have other less-appealing consequences as well.

“Inflation in Israel has still not reached its peak,” Psagot Investment House chief economist Guy Beitor said, adding that, according to the October statistics bureau report, food and housing prices are continuing to climb, Globes reported. 

As the economy slows down, due in part to less borrowing, the business market has already begun to stall. This has likely contributed to the widespread wave of hi-tech industry layoffs that has plagued the start-up nation since March.

Dobi Amitai, chairman of the Presidency of the Business Sector, said the central bank’s reaction to the nation’s economic concerns was sluggish.

“The Bank of Israel reacted late, aggressively and without an up-to-date economic plan,” he said.

Amitai criticized the bank’s seeming lack of a wider strategy in handling the current economic unrest.

“The Bank of Israel has two roles: to ensure price stability while meeting the goal that inflation does not exceed 3%; and to act as an economic adviser to the government and submit recommendations for appropriate fiscal policy,” he said.

“Since the rise in inflation began, and in the many [following] months, the Bank of Israel has not published a plan of recommendations to the government on taking fiscal measures, which are required to curb inflation and create price stability in the economy,” he added.

Amitai criticized the central bank’s apparent one-size-fits-all approach to the issue.

“Using only the tool of raising interest rates is not a serious [operating] plan for the economy,” he said.

Zachy Hennessey contributed to this report.