Title: Rising Interest Rates Take a Toll on Israeli Public’s Finances
Subtitle: Public Asset Erosion Raises Concerns over Household Debt and Investments
Since March 2022, the Bank of Israel’s gradual increase in interest rates has put a heavy burden on the public, impacting households, small businesses, and borrowers across the country. With the interest rate currently standing at 4.75%, families with mortgages face higher repayments, particularly in relation to the consumer price index, which has seen a significant increase of 4.6% over the past year.
Unfortunately, there seems to be no relief in sight, as central banks worldwide continue to raise interest rates in response to ongoing exchange rate fluctuations and inflation concerns. The Bank of Israel closely follows the Federal Reserve’s interest rate decisions, and the Fed has hinted at the possibility of two more rate hikes in addition to its current level of 5%-5.25%.
This trend is not exclusive to Israel, as other countries have also seen interest rate increases. Eurozone rates recently climbed to 3.5% and are projected to reach 4% soon. The Bank of England raised rates by half a percentage point to 5%, and Norway witnessed a 15-year high of 3.75%. Other countries, such as Switzerland and Australia, also implemented rate hikes to combat rising inflation.
The Israeli public, struggling with the growing burden of interest payments, has started to take action, albeit slowly. Some individuals have moved their money to short-term lenders like the Bank of Israel-issued MCM, which provides higher interest rates compared to traditional banking systems. The MCM currently offers a yield of 4.75% for six months to a year.
However, losses have been incurred in other areas, such as the capital market. Rising interest rates led to a decline in bond prices, resulting in significant losses for passive investors who hold bonds through institutions such as provident funds, pension funds, and managed funds. The value of the Israeli public’s assets in provident and pension funds increased by only 10 billion shekels in the past year, while investments in non-linked nominal and index-linked bonds decreased by 26% and 8% respectively.
The public’s investment in stocks also declined by 24%, primarily due to the decline in the value of Israeli shares, which have lagged behind global markets amidst persistent anti-government protests. Despite the U.S. dollar’s surge, assets in dollar-denominated bonds decreased by 15%.
Real estate investments have also been affected, as the erosion of financial and capital assets over the past year caused the public’s portfolio to decrease by around 2.2%, not considering the impact of inflation. In total, public assets have realistically eroded by approximately 7% during the year preceding April 2023.
Despite these challenges, the public’s sense of wealth remains relatively high. However, it is crucial to address the long-term effects of rising interest rates on household debt, investments, and the overall financial well-being of the Israeli public.