When will it stop?

Raising interest rates, the consequences for the pocket and the worrying future

Interest rates have risen sharply in a decade, raising a number of questions: Why did this happen, is the move right and what does 2023 look like for us?

The experts explain

David Rosenthal

04/07/2022

Monday, 04 July 2022, 17:46

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In the video: The governor announces the decision to raise interest rates in the economy (Photo: GPO)

The Governor of the Bank of Israel, Prof. Amir Yaron, announced yesterday an interest rate increase of half a percent, the sharpest increase in a decade.

Why did this happen and when will it stop?

"Two major factors, in our estimation at least, that supported the decision beyond the inflation data were the shekel and the housing market," says

. "In our estimation, in the environment of high inflation in Israel, and in light of the high volatility in global markets, the risk is for the shekel to continue weakening, and in light of the significant transfer of the shekel to domestic inflation, the Bank of Israel had to adjust interest rates to global developments."

"From decision to decision, the Bank of Israel is becoming more concerned about inflation," notes

"The very rise in interest rates by 0.5%, despite the fact that the last price index was not higher than forecast, despite falling inflation expectations and despite a significant deterioration in world economic activity, says the concern about the escape of inflation is increasing. "Both because it is impossible to call the rate of interest rate hikes that has been gradual so far and also because he is not sure that the process in the future will be truly gradual."

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There really was no choice.

The Governor, Prof. Amir Yaron (Photo: Reuters)

Only that inflation does not get out of control

Uri Greenfeld (Photo: Rami Zranger)

Alex Zabrzynski (Photo: Official website, Meitav Dash website)

"The Bank of Israel explained the decision by saying that inflation in Israel is above the upper limit of the price stability target, and that inflation expectations for the coming year are also above the upper limit of the target," adds Dr. Gil

Befman

The index and this is a problematic process for the bank.

"In order to prevent further inflation from turning into an 'inflation-expectations-wage-inflation' spiral, the Bank of Israel has raised interest rates to a greater extent than in previous decisions."

Befeman explains that the Bank of Israel estimates that there is lively economic activity in the Israeli economy and that the labor market continues to be tight with wage pressures: "These are conditions that allow for continued monetary tightening. "In this context, the Governor emphasized the independence of the Bank of Israel and the Monetary Committee."

"The Bank of Israel is more concerned about the effect of wage increases on inflation and notes that the average wage minus the effect of employed vehicles has crossed the trend," Zabzynski adds. .

And what next?

Dr. Gil Befman (Photo: Oren Dai)

According to the Bank of Israel's forecast, the inflation rate is expected to reach 4.5% in 2022 and by 2023 it is expected to fall to 2.4%.

"The inflation rate for the next four quarters, ending in the second quarter of 2023, is expected to be 3.3%," says Befman. A significant supply of housing in Israel. "

He notes that according to the Bank of Israel forecast, the interest rate is expected to stand at 2.75% on average in the second quarter of 2023, which could be reflected in higher interest rates at the end of that quarter: "This assessment of the Bank of Israel "Inflation is higher than the upper limit of the target, along with expectations of continued high-level activity, and against the background of the expected significant rise in world interest rates.

"Apart from the fact that Israel is at an earlier stage in the development of growth and inflation, the Bank of Israel has another unique problem related to the exchange rate," Zabrzynski explains. Significant inflation The weakening of the shekel by 5% against the dollar since the previous interest rate decision alone adds about 0.5% to annual inflation. The economic. "

Will prices fall? (Photo: ShutterStock)

Real estate will cool down, at least until interest rate hikes stop

"Raising the interest rate by the end of the year will naturally cause the real estate market in the country to cool down, as mortgage costs are rising," Greenfeld concludes. "Israel will tighten its belt slightly and reduce consumption during 2023. However, in view of next year, consumption moderation and weakening inflation due to the depletion of global supply chains, the Bank of Israel will probably stop raising interest rates towards the middle of the year, which will return to support the economy and capital market."

"World inflation is still at record levels"

Ofer Klein (Photo: Yonatan Blum)

The rise in interest rates does not come out of nowhere, of course.

To understand what the future holds for us, we need to take a trans-Atlantic look.

"Preliminary data in the United States show negative growth in the second quarter as well, largely due to a decline in inventories," says

. In light of the strong labor market, the governor and senior bank officials emphasize that inflation is also a priority at the expense of lower growth, which has contributed to the recent sharp decline in government bond yields.

This coming Friday, the employment report will be published, which in our opinion will also indicate moderation (but we are still at peak levels).

"Inflation in the eurozone continues to rise to peaks we have not seen for decades and stood at 8.6 percent in June (according to the initial estimate), mainly due to a jump of about 42 percent (!) In energy prices, which will probably increase in July in light of reduced gas supplies from Russia. And food inflation has moderated to 3.7 percent, but the figures continue to support raising interest rates by at least a quarter of a percentage point in two weeks and a subsequent decision. "Therefore, we do not believe the central bank will be able to sustain a rapid rise in interest rates next year."

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