The Monetary Committee of the Bank of Israel, headed by Governor Prof. Amir Yaron, has announced a 0.25% reduction in the benchmark interest rate, bringing it to 3.25% annually. The decision surprised the markets, as most analysts were certain the rate would remain unchanged.
Market reactions: Real Estate gains and dollar movements
reached nearly 1% against the shekel even before the official announcement was published, with the representative dollar rate once again crossing the NIS 3 threshold.
At the same time, the stock exchange responded positively. Real estate and construction company stocks recorded gains, compared to declines in bank stocks, which will suffer from interest rate erosion. The gains in real estate stocks were attributed to expectations that a lower interest rate will boost the sluggish market and lower mortgage payments, particularly those linked to the prime rate.
The extent of the surprise also stems from the fact that the rate cut comes at a time when questions remain regarding interest rate policy in the US and Europe, alongside fears of a budgetary breach.
The Bank of Israel governor explained the decision by citing "a decline in the economy's risk premium, despite high geopolitical uncertainty that led to rising energy prices, and the convergence of inflation to its target in recent months."
Prof. Yaron explained: "It is true that inflation is expected to rise in the coming months, but over the coming year, it will be around the midpoint of the target. Activity in the second quarter rose, but without overseas manufacturing, it was more moderate. To this must be added the new shekel, which does not yet support the moderation of inflation."
Fiscal responsibility: Governor warns of tax increases
He expanded on the budget issue: "Uncertainty will continue until there is a new government. The most important challenge for any government that is established is a responsible fiscal policy, restoring the debt-to-GDP ratio, and funding Israel's security needs without increasing the deficit. There is no unlimited budget."
"The defense establishment must become more efficient because there are no free lunches. This will come at the expense of investments and future taxation. Regarding defense expenditures, commitments must be made only on essential matters. We must cut back on non-growth-supporting expenditures, such as coalition budgets."
According to him, "It appears that even after these steps, there will be budgetary gaps, and I assume taxes will need to be raised. We know that the tax burden in Israel is relatively low in the fifth to eighth deciles."
'Too late and at too slow a pace'
The business sector received the governor's decision with satisfaction. Manufacturers Association President Avraham Novogrocki said: "The interest rate reduction is a correct and necessary step, although it comes too late and at too slow a pace."
President of the Institute of Certified Public Accountants Chen Schreiber welcomed the decision, calling it a step in the right direction that is "like a breath of fresh air for mortgage holders." "I expect two additional interest rate reductions," he added.
Chairman of the Presidium of the Business Sector Dubi Amitai also welcomed the decision, adding: "The governor's decision represents a responsible and proportionate step that signals confidence in the economy."
In contrast, LAHAV (Chamber of Independent Organizations and Businesses) Chairman Roee Cohen attacked the decision: "The interest rate should have been cut by at least 0.5%. The high interest rate particularly harms businesses and the self-employed."