The Bank of Israel invents arguments and excuses as to why it raised the interest rate this week by 0.5% to 1.25%, instead of simply stating that it is looking mainly west of the United States. Therefore, it, the central bank of Israel, must align itself with the monetary world power, raising the interest rate at the same time cumulatively by 1.15% in the last three times, including this week.
The gap between the US and Israel, which was zero in February this year, widened to 0.3% – higher in favor of the US – which may partially prevent the shekel from continuing to depreciate considerably against the currency basket, contributing to a marginal devaluation accelerating inflation. The Bank of Israel, which had to raise interest rates sharply in January this year, when annual inflation exceeded the 3% barrier, beyond the maximum inflation target set for it by the “final” government in June 1997, remained in a strong winter hibernation until the US snow melted.
The government’s inflation target is not an abstract matter, it is set by the government as a task for the Bank of Israel. The idea of an “inflation target”, which has spread to many countries around the world, was born to be implemented in New Zealand in December 1989. The then left-wing government of New Zealand told the New Zealand governor explicitly: “If you do not meet the target, your job ends, sharp and smooth.” Here the Bank of Israel has failed in its role, delayed raising interest rates, but Israeli governments are mainly engaged in politics.
Good morning to the bank
We will return to the Land of Israel. It is good that the Bank of Israel raised the interest rate this week. Inflation must be eradicated. It mainly hurts the weak strata savings that the central bank has not cared about at all in recent years, and also hurts the rise in prices for low-wage earners, who feel their capital is eroding and their wages cannot buy the basket of goods and services, as it was last year. In order to justify raising the interest rate by 0.5%, the Bank of Israel must now find support. Unbelievable, the Bank of Israel has only just discovered, in July 2022, what most of you know without earning a salary of tens of thousands of shekels a month, because apartment prices have risen by 15.4% in the past year.
The CBS reports every month an increase in housing prices, we are all aware of this. To the attention of the Bank of Israel, housing prices have risen in the last six months by an average of 1.6% per month compared to an average (which is also high) of 0.8% per month six months earlier. The huge writing was on the wall, but the Bank of Israel did not act and waited until the chairman of the Fed and his monetary committee took the chestnuts out of the fire and raised the interest rate by a sharp rate of 0.75%, so that the Bank of Israel could make almost a “coffee party”, copy and paste.
The rise in apartment prices is so obvious that there is no choice but to eradicate it through interest rate hikes. We were also asked: Where has the Bank of Israel been in the last two years, when apartment prices raged with a cumulative increase of 22.1% ?! The Bank of Israel insisted on staying, until the last interest rate hikes, with a 0.1% interest rate until March, when it decided to raise the interest rate to 0.35%! This is a very negative real interest rate that will fuel housing prices, leave young apartment buyers and housing improvers helpless, and impoverish and impoverish some of them.
Another “discovery” of the Bank of Israel this week, to explain the sharp rise in interest rates, was that the economy was almost in full employment conditions. In the first half of June, the unemployment rate fell again to 3%, in April it had already reached 3.1%, then rose slightly and then fell again to the historic lows in Israel that were before the outbreak of the corona virus in March 2020. Better late than never: full employment , As in Israel, is a recipe for inflation, so it requires and makes it possible to raise interest rates.
Raising the interest rate in the tight employment market is essential today in preparation for the wage agreements that will be opened (mainly in the public sector) next year. The justified struggle of the oppressed teachers is only a prologue to the future in the rest of the public sectors. These are wage increases that will add fuel to the inflation fire. Therefore, the current unemployment rate probably makes it possible to raise interest rates to prevent inflation from rising wages.
Not only that, for many months now the Central Bureau of Statistics has been publicly announcing that the number of vacancies since January has ranged from 150,000 to 155,000 – a record never before seen in Israel. It is simply difficult to find workers in all areas of employment and services. Such a significant figure, if it had reached the decision-makers in the Bank of Israel, could probably have supported the early increase in the interest rate and its rate and prevented the suffering of inflation accompanied by the rise in housing prices, which harms the hearts of young couples and housing developers.
Have you heard of Ukraine?
Another revelation that has just come to the attention of the Bank of Israel and influenced the decision to raise interest rates by 0.5% is Russia’s invasion of Ukraine on February 24, which hurt Russia’s oil and gas supplies to the West and led to sharp rises in energy prices. The price of oil in the North Sea during the invasion on February 24 was $ 92.6 a barrel and is currently rising to $ 113 a barrel – a 22% increase. There are currently no solutions to the energy problem that US President Joe Biden will try to solve during his visit to Saudi Arabia in the middle of the month.
There were also problems in the supply chain in the world due to the exit from the corona virus, and the Bank of Israel has also just learned about this. But by the time the Bank of Israel remembers and decides to raise interest rates for this reason, there is actually a moderation in supply chain problems. The number of merchant ships in the world has risen significantly in recent months, and freight rates are declining significantly. In June alone this year, the world’s main marine transport index fell by 16%, and the bulk transport index fell by 13%, respectively. The transport index from Southeast Asia to the Mediterranean is stable.
The Bank of Israel also discovered China’s response to the rise in Corona virus cases and the closure that accompanies it – which has reduced world supplies. By the time the Bank of Israel discovered the Chinese “secret” of the quarantine, the Chinese had already abolished it and were in fact imposing fiscal and monetary measures to renew the encouragement of growth. The Chinese measures are quite confusing to the Bank of Israel, really unfair to it.
Moreover, we will reveal to you the clear secret only to knowledgeable people, and that is that the prices of agricultural goods as well as industrial goods are in a sharp decline and are retreating from the highs to which they have climbed. The price of corn – close to 20%, the price of soy – by 17%, the price of cocoa – by 8%, the price of sugar – by 7% and the price of rice – by 6%. For an increase in commodity prices in shekel terms.
The Bank of Israel did not raise the interest rate on time, and therefore prevented the public from now enjoying the decline in the dollar prices of agricultural commodities. Neither the contractors nor the subsequent buyers of the apartments can benefit from the decline in the prices of raw materials against the background of the devaluation of the shekel. We will reveal to you that during the month of June, in dollar terms, steel prices fell by 8%, copper by 16%, aluminum by 12% and nickel by 23%.
Note: It is precisely now that inflation expectations for next year have fallen. In addition, the Bank of Israel reduced the level of GDP by 1% in 2023 compared with the previous forecast – a 0.5% reduction in the growth forecast this year and another 0.5% of the growth in 2023. That is, precisely when the growth forecast was higher, there was room to raise interest rates. When is the interest rate raised? Now, when growth forecasts are reduced. Good thing they raised the interest rate considerably, just had to do it earlier.
Scouts
The Bank of Israel has also revealed that the monetary tightening and difficulties in the world production chain are already hampering the growth in the developed countries that Israel is tied to in its growth. Theoretically, if there is a slowdown in world economic activity, one should not rush to raise interest rates by 0.5%, perhaps it is better to wait? But one must work with the “first come, first served” method. If only now have the Central Bank belatedly discovered the difficulties of production and monetary tightening, first the interest rate should be raised by a sharp rate of 0.5%.
If it later becomes clear, in fact already now, that the growth forecasts of investment houses have been updated downwards, then in the future it will be possible to slow down the rate of interest rate rise, and in the future there will be no way to reduce interest rates. Order is order in the Bank of Israel, processes must not be bypassed, and developments in the world economy are indeed confusing.
The Central Bank expects that the interest rate in the Israeli economy will rise by the second quarter of 2023, ie in a year, to 2.75% – an increase of another 1.50% compared to today. The capital market expects the interest rate to rise to 3.2%. The central bank also forecasts that inflation in the coming year, by the second quarter of 2023, will be 3.3%. In the capital market, inflation is forecast for the same period of 3.5%. What the central bank “promises” is that it is very possible that in a year’s time the real interest rate in the money market – meaning a term of up to a year – will be negative.
Since the government is also expected to have a budget surplus next year – 1.1% compared to the expected 0.7% surplus this year – the fear of a further rise in interest rates in the capital market, the lending market over a year, which is also affected by government demand for capital, will disappear. Thus the interest rate in the capital market, which is the market for taking out mortgages or taking out loans by entrepreneurs and contractors, will remain relatively low, good for economic growth, if there is no lending in excess speculation.
The Bank of Israel says that raising the interest rate by a sharp 0.5% is intended to signal to the public, the economy, businesses and decision-makers that the central bank is determined to raise interest rates in the coming year. The Bank of Israel wants the public to believe that it is committed to reducing inflation. The question is whether the public, whatever it is, believes in the Bank of Israel’s commitment, which failed this year, or whether the adult public and investors should follow the US Federal Reserve, it is the Fed, to know what is happening. What will happen and what will happen one day in Israel? Because from America will come the gospel.
Shlomo Maoz