While the interest rate in the economy increased by 0.5% last week, the interest rate on deposits increased by an average of only 0.25% on deposits for the year, that is, about half of the Bank of Israel interest rate increase
The data shows that there continues to be a significant gap between the interest rate offered on deposits for a month, which now stands at an average of 1.72%, compared to the interest rate offered on the closed deposit for a period of one year, where the interest rate is more than doubled and reaches an average of 3.65% (the data refer to deposits of NIS 10,000 or more).
This gap is due to the fact that the banks want to divert customers to longer-term deposits, and this is because the loans they give are also given for a long period, and deposits are for them the source of loans.
An example of the banks’ attempt to divert funds to long-term savings could be seen when last week Bank Hapoalim announced a new savings plan, in which for a deposit for a period of one and a half years the bank pays an interest rate of 7%, representing a relatively high annual interest rate of 4.61%. For comparison, the operators offer an interest rate of only 1.5% on a monthly deposit. It is important to note that this is a program without exit points, and the relatively attractive interest rate is intended to compensate for closing the money for a relatively long period.
As for the monthly deposit, the highest interest rate is offered by the Bank of Jerusalem with 2.9%. It is followed by the digital bank One Zero, which offers an interest rate of 2.65%, which is linked to the change in the prime rate. Despite the increase in the Bank of Israel interest rate, One Zero did not raise the interest rate on this deposit, but it is still one of the highest interest rates offered on a monthly deposit. The Bank of Jerusalem and One Zero are the only two banks that offer interest rates higher than 1.5% on a monthly deposit.
On the other hand, the lowest interest rate is offered by Discount Bank with only 0.85%, and it is the only one that offers an interest rate lower than 1%. However, for a one-year deposit, it actually offers the highest interest rate among the major banks.
For an annual deposit, the average interest rate today is 3.65%, which is already an interest rate that is not far from the Bank of Israel’s interest rate, when there are banks that even offer a higher interest rate than the Central Bank’s interest rate. The highest interest rate for an annual deposit is offered by the Bank of Jerusalem with 4.1%, while in second place is One Zero with 4%, but at One Zero the interest rate is linked to the prime rate, so those who deposit today for a period of one year are likely to benefit from an increase in interest during the period.
In third place is Discount Bank with 3.9%. Bank Leumi, which offers an interest rate of 3.5%, is the bank that made the most significant increase in this route: an increase of 0.4% compared to the 3.1% interest rate it offered at the beginning of the week. This is an increase of 80% of the Bank of Israel interest rate increase. Despite the sharp rate of increase, Leumi’s interest rate is now not unusual, and the relatively sharp increase mainly narrows the gap compared to the offers of competing banks. The lowest interest rate is offered by Bank Yahav, and it is 3.25%.
While on the lending side the banks almost always pass on the full interest rate increase to the loan price, on the deposit side they partially pass on the interest rate increase, and this is a major factor that resulted in a significant improvement in their level of profitability this year. The banks are expected to end 2022 with huge profits of over NIS 20 billion.
At the press conference held last week as part of the announcement of the interest rate increase, Bank of Israel Governor Prof. Amir Yaron addressed the issue of transferring the interest rate increase to the deposits and said: “For a long time I have been saying that I want to see the interest rates on the deposits increase, as I was not satisfied, and I must say that the issue has really been improved. Even in an international comparison, the interest rate on deposits increases relatively more in Israel, and I want to see it increase even more.”
However, the governor noted that bank customers also have a great responsibility to make sure that the interest is rolled over to the deposits: “We challenged the banks, and here we also want to see the customer challenging the bank, pricing and switching banks as he or she sees fit.”
The increase in the interest rate on deposits (even if it was done partially) increased the attractiveness of this channel after many years in which it produced a zero return due to the low interest rate in the economy. In addition to the instability of the capital market in the last year, we have seen a large flow of funds into the solid channel. In recent months, more than NIS 50 billion have flowed into deposits every month, more than double compared to the corresponding period last year.
According to estimates in the banking system, the flow of funds to deposits will only increase this year. The reason is that it appears that the wave of interest rate increases is likely close to exhaustion. As long as the interest rate was in a process of rapid increase, the attractiveness of the deposits was questionable. First, in short-term deposits the interest rate offered is quite low. In deposits for one year, it may have been reasonable at the time of the deposit, but a situation has arisen in which customers close the money at a fixed interest rate for a period of one year, but two months later the interest rate in the economy has already risen significantly, and the deposit remains at the same interest rate, which is no longer attractive – especially in relation to the new interest rate in the market. Although there is also an alternative of making a deposit in the deposit attached to the change in the prime interest rate, in most cases the interest rate in advance was relatively low.
The mountain of money in Osh is still quite high, and as of the end of September stands at about NIS 550 billion, money that will be eroded by inflation. So there is a potential for money to be transferred to deposits
In contrast, now the interest on deposits for one year is already over 3.5%, and in some cases even over 4%. And more importantly – most of the interest rate hikes have probably been exhausted (unless an extreme scenario of the outbreak of inflation or another event occurs), therefore the fear of closing savings now with an interest rate that will not be relevant in a year, has decreased significantly.
At the same time, the mountain of money in the current account is still quite high, and as of the end of September stands at almost 550 billion shekels, which do not accrue a return, and their value has actually eroded due to inflation. So there is a potential for money to be transferred to deposits. Therefore, it is quite possible that the coming year will be a record year in fundraising for deposits.