The Bank of Israel is expected to publish the level of interest rates in the economy on Monday, and according to all estimates, the interest rate is expected to rise. This, following the first increase in 4 years last March to a level of 0.35%, with the basic assumption being that the Bank of Israel will raise the interest rate on every decision in the coming year. This time too, the main question is not whether the Bank of Israel will raise the interest rate, but by how much. Will the central bank surprise with an aggressive increase of 0.4%, or will it settle for a more gradual increase of 0.25%.
■ The Bank of Israel is expected to raise interest rates tomorrow. The question is just how many
How the Bank of Israel reads the map of the economy
On the one hand, economic growth data for the first quarter surprisingly pointed to a contraction in GDP, and a slowdown in private consumption and high-tech exports against the backdrop of market turmoil – which may indicate some risk of aggressive interest rate hikes.
On the other hand, Governor Amir Yaron and the Monetary Committee of the Bank of Israel have good reasons to believe that the economy can also absorb a rate hike closer to the upper threshold of 0.4%. The rate of inflation in Israel is at a peak of more than a decade, core inflation (excluding food and energy) also exceeds the target of the central bank and the tight labor market with an unemployment rate falling to 3.1%, lower than the pre-corona period. All of these support a faster restraint of economic activity.
The central growth wheels are slowing down
Given the fact that the strong growth data of the economy in the last quarter of 2021 contributed to the decision to raise interest rates in March, it is interesting how much weight the Bank of Israel will give to the disappointing recently published GDP data. The first quarter of 2022 surprised forecasts that estimated growth of 2.3% and showed a slowdown of 1.6% in gross domestic product. The contraction of the economy came even before the effect of raising the Bank of Israel’s interest rate. However, the slowdown came after an unusually high growth in the previous quarter (of about 15% after the CBS update), and it is still an impressive growth rate of 9% compared to the first quarter last year.
The consequences of the interest rate hike in March will be felt mainly in the coming months, but already in the first quarter of the year there was a surprising decrease in private consumption of 0.7%, perhaps in light of the expectations for the interest rate hike that tightened the belt even earlier. In the same quarter, there was also a decline in high-tech exports in the face of a change in macroeconomic conditions in the global economy that shook the markets and caused reasons for concern in the economy’s growth locomotive.
The Minister of Finance, Avigdor Lieberman, also said last week that “of all the data in the economy, I am concerned about the decline in Israeli high-tech exports.” The central bank, on the other hand, has repeatedly warned that it is not worth continuing to rely on continued tax revenues that came from high-tech, implying a slowdown in the industry. When the two main growth engines of the economy – private consumption and the high-tech industry – point to a slowdown, it is not inconceivable that the Bank of Israel will be content with a gradual increase in interest rates.
Another factor that supports a more gradual increase in interest rates is the inflation data in the economy, which reached 4% in April – above the Bank of Israel’s upper target range of 1%, but in a global comparison the inflation rate in Israel is lower in developed countries. On the other hand, core inflation (excluding energy and food) rose by 3.5% – also above the Bank of Israel’s target range.
Beyond that, world inflationary pressures are expected to continue, with the effects of the war in Ukraine reaching further down the road. Gil Befman, chief economist at Bank Leumi, estimates that the Bank of Israel will opt for an aggressive increase: In the data of the National Accounts, this week and the continuation of the rising trend in interest rates worldwide – all of these will cause the Bank of Israel to raise the interest rate to 0.75% in the next decision. “
Although the increase in interest rates in Israel will not have an effect on the prices of products imported into Israel, it does affect non-marketable products that are driven by internal factors that rose at an annual rate of 3.7% in April, and this monetary committee At what level.
Alex Zabrzynski, the chief economist of Meitav Investment House, also estimates that the Bank of Israel is expected to raise interest rates by 0.4%. “The inflation rate has risen to 4%. There are no signs of a moderation in inflation, but rather its spread to more areas. The weight of the items in the price index whose prices continue to rise continues with the inflation rate. The slowdown in growth is expected to reach the Israeli economy. “In any case, like most central banks in the West, the Bank of Israel is expected to give greater weight to its considerations of eradicating inflation.”
The rising prices of mortgage takers
And what is the impact on mortgages? The “Through Us” mortgage advisers network explains that the rise in the consumer price index has a more dramatic effect on mortgage takers than the rise in interest rates, and even if the prime interest rate rises to 1.5%, its effect will be negligible compared to the rise in the index. But also the loan principal.
For example, the company took a scenario of a mortgage of NIS 1 million, which includes two tracks: one-third of its mortgage at prime interest rates and two-thirds of its mortgages at fixed and index-linked interest rates. If the prime interest rate rises to 1.5%, the monthly repayment will increase by NIS 25. However, the increase in the index by 4% (on 2/3 of the loan) means an addition of NIS 142 on the monthly repayment.
Raising the interest rate will further strengthen the shekel
Bottom line, inflation data, the tight labor market, rising housing prices, support a 0.4% increase in interest rates. However, after the strengthening of the shekel last week, a sharp rise in interest rates will strengthen the shekel even further – which is likely to hurt exporters, and the Bank of Israel may want to continue to let interest rate differentials with the US support the weakening of the shekel.
Also, it is possible that the initial data for the first quarter of 2022, which indicated a certain slowdown in the two main growth engines of the economy, along with the turmoil in the markets in the face of uncertainty in the global environment – these do not support a sharp restraint of economic activity. . Answer to the question of how gradual the raises will be we will receive on Monday at 16:00.