The Bank of Israel today raised the interest rate by 0.4% to 0.75%, and this is just the beginning: we are entering a long process of raising interest rates. The Bank of Israel stated that it expects the interest rate to be 1.5% at the end of the year. The interest rate hikes are an attempt to curb inflation that is raising its head in the world and also in Israel, where the annual inflation rate is currently 4%, one percent higher than the upper limit of the target set by the Bank of Israel.
Raising interest rates has other effects: it cools asset prices like stocks, and is not good for the debt market. This is one of the reasons for the declines in the markets since the beginning of the year, which is reflected in the returns of our savings, and it is also one of the reasons that we will continue to see high volatility later in the year.
Here are three points where raising interest rates meets us:
Mortgages and loans: rising prices
Raising the interest rate increases the price of all types of loans linked to the prime interest rate (which is the Bank of Israel interest rate + 1.5%), including most consumer loans, most loans taken from institutional entities, and the prime-linked mortgage route. However, it is important to say about mortgages that the inflation rampage is much more problematic for index-linked mortgage borrowers (about a third of the index-linked public mortgage portfolio) than a rise in the Bank of Israel interest rate, probably at a time when interest rates are still low.
For new mortgage borrowers, the increase in the Bank of Israel’s interest rate, which is equivalent to the risk-free interest rate, actually increases the interest rate in all directions, since it is the basis for pricing the spreads of the various risks. Those who currently take out a mortgage should take into account that the monthly repayment is expected to increase and change later this year, in contrast to the last decade where the repayment was relatively stable.
Solid savings: more alternatives
As interest rates rise, we will see more and more alternatives to solid savings at reasonable returns. In the picture shows the low interest rate that almost completely mimics the various alternatives for solid savings in banks, and sent the public to the capital market and real estate.
Real Estate Market: Without Significant Impact
Just as in 2008 the process of lowering interest rates soared real estate, so the expectation is that rising interest rates will lower real estate prices: financing is rising, and the public is once again faced with alternatives to investing their money solidly in other channels. However, since real estate prices also depend on market supply, it is difficult to see at this stage, when interest rates rise but in the long run is still low, a significant impact on housing prices. This may come, when the Bank of Israel interest rate is five times higher.