The decision today by the Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, to raise the interest rate by 0.25% to 4.75%, was expected, after the high April Consumer Price Index (CPI) reading of 0.8%. Speaking shortly after the announcement Yaron told "Globes," that the Bank of Israel was surprised by last month's CPI. "We identified high inflationary factors such as travel abroad and that resulted in a large part of the surprise for us as well as the rest of the professional bodies."
"That said it is clear to us and clear to everybody that if we had not taken the interest rate measures that we did, we would have much higher inflation today, perhaps double digit as we have seen in many other countries. If we did reach a double-digit level, there would have been substantial harm to all households, especially the weaker populations, and at those levels the public begins to lose faith in the shekel. In such a situation, people would start writing contracts in dollars, as it once used to be."
He added, "We are seeing trust from the professional agencies like the IMF and ratings agencies (in the Bank of Israel's measures) and most importantly the expectations of the market, despite the stickier inflation, by the middle of 2024 we expect to return to the target range (annual inflation of 1%-3% compared with the current 5%).
Today's interest rate hike makes the average mortgage (NIS 1 million over 30 years) more expensive by NIS 20,000. In terms of monthly repayments it adds NIS 55 and since the start of the rate hikes in April 2022, the average annual mortgage repayment has risen by NIS 1,200. Asked about this Yaron said that the Bank of Israel is examining the situation all the time. "We are also examining the pain for each socioeconomic level, for mortgage takers etc."
"There has to be pain in bringing down inflation"
How concerned are you about households and small businesses that cannot meet their loan repayments?
"We have very detailed data on mortgage borrowers, both from a credit data database and from the supervision of banks, and we do an analysis by regions and income deciles. However, mortgages in Israel are given in a conservative way, whether in terms of the percentage of the loan of the property or the repayment rate from disposable income, and we know that the repayment has increased and that it hurts, but the system is conservative and as a result you see the stability and the ability to repay."
Was there any hesitation on whether to raise the rate by 0.25% or perhaps more?
"We see inflation that is really stickier and an economy that is still very active. On the other hand, we do see indicators of moderation, if it is credit cards and the housing market, a decline in private consumption and job vacancies. Therefore, we think that the right balance is, on the one hand, to continue resolutely with interest rate hikes, which is the main tool for lowering inflation, but the higher you are, you have to do it in a more measured way. There has to be a certain pain in bringing down inflation and we are doing it with the minimum pain possible."
"I would expect the banks to incentivize customers
The decision to hike the rate again comes as the banks are reporting higher profits. Bank Hapoalim, for example, reported record profits of NIS 2 billion in the first quarter of 2023 and Mizrahi Tefahot Bank, Israel Discount Bank and First International Bank have all reported record profits, mainly due to a 50% jump in income from interest.
Do you think these profits are reasonable?
"First of all, there is no doubt that both in Israel and worldwide the rise in interest rates has made a significant contribution to the banks' profits, and in Israel in particular where there are many inflation-linked contracts, so this track too has seen an increase in income. At the Bank of Israel, we have done a lot to increase competitiveness for customers and make information accessible, including the publication of interest rates on credit products and deposits, through a reform for transferring between banks and transparency in mortgages.
"But there is too much of the public's money lying around in checking accounts and in interest-free deposits, which is a shame. I would expect the banks, and some of them have taken a welcome initiative, to make it easier for mortgage borrowers who face certain difficulties, and they are coming towards them and that is good. But I would expect them to also take the initiative and identify who has too much money sitting in a bank account over time, and encourage them to make sure that the money can be in fixed-term deposits, at least so they will earn interest."
You are approaching the end of your first term of office, would you want to continue for another five years?
"Of course the value of stability is very important and I am still working 24/7 to protect the economy, contribute to it and of course bring inflation back down to the target range. I will not deal publicly with the issue of an extra term, but I assume I will make a decision regarding my next steps in the near future."
Published by Globes, Israel business news - en.globes.co.il - on May 22, 2023.
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