Prof. Michel Stravczynski, director of the research division at the Bank of Israel, spoke this morning (Tuesday) with Golan Yochpaz and Anat Davidov on 103FM about last night’s interest rate increase of 0.75% and explained what is behind the biggest jump in the interest rate in the last two decades.
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At the beginning of his remarks, he explained why they raised the interest rate gradually and did not choose an aggressive step from the beginning and said: “I am ready to tell you at the beginning of the conversation that we will raise the growth forecast that will be published later, the reason for this is that data was published in the Central Bank that the economy is growing very nicely, even in retrospect. It turns out that we are already 3 quarters above the trend that existed before the corona.
“Regarding the issue of inflation, there was an element here that we could not foresee, which is the Ukraine-Russia war. If you look at inflation as it appeared at the end of 2021, there was no reason to raise the interest rate, we were within the target, it would not have looked like an inflationary issue at all. After The war, there was a very large jump in both oil prices and commodity prices, as a result of this the whole inflationary picture changed and interest rates began to rise in all countries, not only in Israel, but in many countries.”
When asked what changed between April of this year and August of this year, he replied: “It didn’t change in April, it changed in February, and this is the war. The war resulted in a very large jump in prices, both in goods and in oil prices. As a result, the entire inflationary environment increased all over the world, and Israel She is not the only one raising interest rates. We are among those who had to raise interest rates less than other countries. We do want to beat inflation, we have determination and we will probably succeed.”
“We announced once before we started the interest rate increase so that people would be ready, that we would start such a process that it would continue, why? Because people need to understand that when they take out a mortgage, not with a fixed interest rate, but it is linked to the index or it is also with a variable interest rate, they are exposed For what is happening, that’s why we did it even once before we started uploading. We do it according to the data.”
When asked if, in retrospect, it is possible that they should have been more aggressive, he replied, “No, because the inflationary accumulation was not until February.” When asked about the political instability and its connection to the economy, he replied that “the political instability was manifested in the fact that in Israel in recent years there have been repeated elections, this is not the best phenomenon in terms of governance, in what sense? That you are in long periods without a budget.”
“Regarding the warning we wrote this time, it is not a warning in a negative direction, it is a warning in a positive direction and it is like this – it is very desirable that the government, as soon as it begins to act, act very quickly to have a budget. This is not a reason for a crisis, everything is fine, but what? You are not doing the reforms You don’t plan to increase investments in infrastructure, you don’t plan, for example, to have high-level optical fibers, you don’t plan to have investments in roads.”
When asked how long he estimates it will take until yesterday’s dramatic interest rate hike begins to have a real effect, he replied: “We are already seeing the first buds of a reversal, but I don’t want to commit that this is actually the peak point – what we have seen now – but we do see the buds of a reversal. We have seen a drop in oil prices Globally, we have seen a decline in many goods.”
Could it be that we have reached the peak of the current wave?
“You can’t dismiss what you just said, but I can’t make a commitment, and the reason for this is that the nominal part is very volatile, that is, it might suddenly reverse, but oil prices will go down.”
“We have already stated in advance that the process of raising the interest rate is gradual and the reason is so that people understand it, prepare for it and make decisions accordingly, we said that in advance. The last time we published a forecast, we wrote 2.75%, so what we have done now is simply to advance the beat so that people They will understand that there is determination here and that the Bank of Israel can be trusted.”
When asked if we will reach a 2.75% interest rate, he replied: “2.75% is the latest forecast, we will have to update this number, we will update it in the next forecast. It will be higher than the number that is today, because today’s direction for the coming months is still inflation above the target, but you You asked if we are at the peak, it is difficult to answer at the moment, but overall we do see the beginning of things going in the opposite direction.”
Finally, he was asked if the Bank of Israel has other tools besides raising interest rates: “As of today, this is the main tool because it also works broadly on all issues,” he concluded.
Assisted in the preparation of the article: Amitai Doak, 103fm