This evening (Monday) the Bank of Israel raised the interest rate for the eighth time in a row and set it at 4.25%, above the forecast that its research department presented only about a month and a half ago, when it is clear that this is not the last interest rate increase. The Governor of the Bank of Israel, Prof. Amir Yaron, says in a conversation with Globes that despite the understanding that every interest rate increase increases the economic burden on the citizens, especially the mortgage holders, “it is impossible to lower inflation without causing pain.”
● The interest rate jumped for the eighth time: how much did the average mortgage repayment become more expensive?
● This is the figure that paves the way for further interest rate hikes Interpretation
● “This is not the end of the verse”: economists predict that the Bank of Israel will continue to raise interest rates
The governor also refers to a possible downgrade of Israel’s credit rating as a response to the changes promoted by the government in the judicial system and explains when in his estimation inflation will return to the target set by the Bank of Israel, which is between 1% and 3%, when it currently stands at an annual rate of 5.4%.
Just a month ago, the bank’s research department presented a forecast for an interest rate of 4% until the end of the year, and has this level already been breached?
Yaron: “Let me remind you that in the previous decision we already said that if the data were sharper we would have to reach higher interest rates than the forecast, and indeed that is what happened. The data was stronger. The index surprised us and all market participants. Equally important, core inflation seems more sticky and the decision takes into account the The balance between the risk of inflation and the moderation of activity.
“Our main role and responsibility is to make sure that inflation does not increase and does not cause damage to the economy. Price stability is a basic condition for a stable and growing economy, and the interest rate tool is the one we use. Before taking any steps, we examine the world of mortgages and know that it hurts, but you cannot lower inflation without the pain this and we will continue to work to eradicate it.
“As a matter of fact, we see from the data that the Israeli economy is in high activity and employment is high, which has even increased at the end. And I want to say one more thing: it is true that there were a number of interest rate increases, but despite the surprise in the index, inflation expectations show that we will return to the target at the end of this year or at the beginning of 2024. If before we were in the direction To return to the target at the end of this summer, so now we are talking about the end of the year or the beginning of next year and this would not have happened without the interest rate hike policy.”
Is an interest rate of 4.5% or 4.75% the record or may we see an interest rate similar to that of the US, which is currently priced to reach a record of 5.25%?
“We really believe that in the coming months we will see a more significant decrease in inflation. Despite what I said about core inflation, we are seeing the beginning of moderation, for example in the mortgage market as well as in other areas. I believe that the expectations are consistent as long as there are no shocking surprises such as in the budget or wages. Most of the interest rate increases Certainly behind us and at this point we need to see the data that will come later and act on it.”
Mortgage takers are already paying NIS 1,000 more every month compared to what they paid a year ago. Are you afraid that continued interest rate increases will lead to credit failures?
“I will emphasize again that we are aware of the pain and of course analyze it and the issue of mortgages in all our decisions. But I will also mention that inflation hurts the weak populations first and foremost, and if we do not eradicate inflation the pain will be much greater in the future, especially for these populations. Our data shows that the increase in the monthly repayment of the mortgage The average taken in the last five years is below NIS 600. We understand the pain, but it is impossible to lower inflation without some pain.
“I am happy about the steps the banks have taken. The interest rate tool is a horizontal tool. Mortgage loans in Israel are given conservatively, whether it is the monthly payments or the size of the loan, and we do not see a systemic problem. It is good that the banks are helping those households that are in a point of extreme distress, whether by A formal outline or in a point-by-point manner”.
“The independence of the governor and the Bank of Israel is extremely important for the economy”
In recent weeks, against the background of the changes in the legal system that are in the midst of a legislative process, economists in Israel and around the world have warned that rapid and wide-ranging changes may harm Israel’s economy, and even lead to a downgrade of Israel’s rating. The governor himself conveyed messages to the government in the spirit of what he heard from those economists and international bodies.
Are you afraid of the downgrading of Israel’s credit rating or do you see indications of it?
“I don’t have a crystal ball and I can’t predict the future. Obviously, as an economist, it’s important for me to reflect the world’s experience and say that we know, and I’ve expressed this publicly, that independent and strong institutions are an essential component of a developed and prosperous economy. For this reason, many of the international bodies diagnose this issue. Therefore , in any process that is promoted, the independence and strength of the institutions must be preserved. But it is also important to understand that Israel’s economy is strong and growing, certainly compared to other countries today. The state of the economy is strong. The economy has also shown dynamism and the debt-to-product ratio has dropped to the level it was before the corona virus.”
Two weeks ago, the governor got into some sort of confrontation with the chairman of the Knesset’s finance committee, MK Moshe Gafni. So much so that after he conveyed a message about possible damage to the Israeli economy, Gafni asked him why he, as governor, should intervene in a question where one half disagrees with the other half.
Are you afraid of harming the independence of the Bank of Israel?
“The independence of the governor and the independence of the Bank of Israel are of course extremely important for the economy, and the international bodies speak clearly about this as well. We know what history shows regarding those countries where the independence of the central bank was compromised, and this had a devastating impact on the economy. I believe that all decision makers understand the It”.
In recent weeks, several investment houses and even some banks have spoken out about the fact that investors are starting to withdraw their money from Israel, and others will think twice about investing their money in Israel. The first to speak about this, Bank Hapoalim CEO Dov Kotler, said this in a conversation with the Prime Minister, Benjamin Netanyahu, in front of dozens of business leaders.
The Bank of Israel monitors foreign exchange movements continuously. Have you seen a significant transfer of funds from Israel to abroad by foreign investors or by Israelis?
“We are in dialogue with the banks on a frequent basis and are aware of the dialogue that is out there. From our monitoring, in the governor’s view, we do not currently see any abnormal activity at the macro level.”
In the last month, there has been a relatively significant devaluation of the shekel, at a rate of almost 3%, which may weigh on inflation. How dramatic is that to you?
“The shekel has undergone many fluctuations in the last three months. We have seen it touch 3.35 shekels to the dollar and recently it has hovered around 3.55 shekels to the dollar. At the same time, we see that recently the close connection that existed between the exchange rate of the shekel and stock market performance has weakened. However, the changes These occurred in a very short period of time, so it is difficult to point to a clear trend, but the uncertainty certainly does not help the strengthening of the currency. It is clear that if the other parameters are kept constant (which define the level of inflation, RU) and there is a devaluation of the currency, it does not help to eradicate inflation.”
Since the beginning of the year, there has been a significant decrease in the state’s tax revenues. How does this affect your policy and would you recommend the government to reduce spending?
“There is no doubt that we saw high tax revenues in the past year, and we associate this, among other things, with the tide in the real estate sector as well as in high-tech. The decline is from a very high level, but it is still high. In our assumptions for the fiscal plans, we take into account that there will be a certain decrease, and therefore in the discussions on the budget, we constantly emphasize the need for the government’s fiscal responsibility, and I am glad that the Minister of Finance is speaking out about the coordination between the fiscal measures and the monetary policy.”