The Bank of Israel continues to raise the interest rate by 0.75% and it already reaches 2.75%, an interest rate that has not been here since 2011. The prime interest rate will now be 4.25%. The next interest rate decision will be on November 24. Join the press conference live here on BizPortal.
It is interesting to note that the central bank expected the interest rate to reach the current level only in the third quarter of next year – and here it has already reached this level now. The central bank raises its interest rate forecast and expects it to be 3.5% in the third quarter of next year. In other words, the bank expects a slowdown in the rate of interest rate increases, since it is a 0.75% increase compared to the current level, over a year.
The local market immediately reacts to the interest rate decision – the increases in Tel Aviv become stronger and the stock market rises by 1.9%. The reason is the Bank of Israel’s expectation that inflation will moderate in a year to 2.7%, within the target range of the Bank of Israel. The expectation for the end of 2023 is for inflation to moderate to 2.5% (slightly above the previous forecast of 2.4%). The expectation for the end of this year is 4.6%, the current level (slightly above 4.5% in the previous forecast).
The Bank of Israel raises its growth forecasts for 2022 and now expects growth of 6%, above its previous forecast of 5% growth. In 2023, the bank expects GDP growth of 3%, below the previous forecast.
Governor Prof. Amir Yaron at the press conference: “In our forecasts and raising the interest rate, we took into account inflation in Israel and the world, housing prices, as well as the political uncertainty in Israel. As we know, it takes time for interest rates to affect inflation, which exceeded the Bank of Israel’s target range. However, inflation in Israel is low compared to the rest of the world. We were among the first to resort to monetary tightening.”
“Inflation is also due to increased local demand, we see price acceleration also in demand for local products and services. Inflation is also affected by external factors – the war in Ukraine, oil prices and inflation in the world. We are working to curb the effects. I say this despite the decrease in the index in August. But I remind Because this is just one observation. Anchoring inflation expectations within the price target is one of our main goals.”
“Rental increases are also reflected in inflation, but beyond that, the high rate of price increases as recorded in the last year is a problem for the economy. However, the latest construction data indicate a continuous increase in the data of construction starts, while on the other hand we see a moderation in the mortgage data.” “The employment rate in Israel is at a record high, but looking ahead, the sky is getting darker and this may affect the local market as well.”
According to the governor: “In the future, we expect interest rates to drop to 3% plus. We understand the pain of the households, but we do not want to get to a situation where we have to raise it further beyond the 3% plus range in the forecast, so we are now taking a rapid increase. We have to find ourselves in the future with a positive real interest rate and we need to lower inflation for that purpose.”
“The worsening of the energy crisis in Europe may affect Israeli exports, as well as the lack of success in the world to slow inflation. Also in Israel – what will be the policy of the next government and how many wage agreements and wage increases it will sign. It seems that the risk of a recession in Europe is increasing significantly. The uncertainty in the world alongside the monetary tightening giving their signals on the financial markets with relatively high volatility and a decline in technology companies.
“In conclusion, Israel’s economy enters the new year in a solid state. Aside from the challenges, we must promote reforms and new investments for the benefit of continued GDP growth in the future. Any government that is elected must take care to work towards these goals, pass the state budget and pass the reforms on the table and other reforms. Uncertainty is not good for the economy, and it is increasing. But Israel’s economy is strong and has proven its ability to grow even under conditions of uncertainty and global difficulties.”
Referring to the interest rate gap between the Bank of Israel’s interest rate hikes and the interest rate hike on bank deposits, the Governor said that “I want to see the gap close between our interest rate hikes and the banks’ deposit hikes – so that everything goes to the public.”
We will remind you that despite the decrease last month, inflation in Israel stands at an annual rate of 4.6%, well above the target of the Bank of Israel (range of 1-3% per year). Apartment prices jumped 2% in August and 18% in the last year. The Bank of Israel is expected to continue raising interest rates and is already reaching the interest levels it expected to be only in the middle of next year (2.75%). The bank is trying to curb inflation – but of course this has lateral effects: the mortgage-paying public pays more money. Here is the calculator: >>> How much did your mortgage repayment cost?
The Bank of Israel Governor’s decision to raise the interest rate by 0.75% increases the monthly repayment on her existing mortgage by NIS 185 and adds up to an increase of approximately NIS 620 within six months. with a significant expectation of further increases in the coming months.
The Association of Mortgage Advisors states that the significant increase in the monthly repayment, which is expected to continue in the coming months, will bring the repayment ratio of many households closer to 40% of their monthly income. A threshold that is considered very problematic in terms of the ability to meet and pay the mortgage over time. If you add to this difficult figure the fact that some households are forced to take non-bank or retail loans to purchase an apartment or to pay the construction input indices, a much more difficult picture emerges. “In practice, the central bank is betting on the financial strength of borrowers in Israel.”
They predict that in light of the sharp increase in the risk indices, we will soon see a tightening of the underwriting conditions and the ability to get a mortgage. “Soon, we will see additional layers of the population that cannot purchase an apartment.”