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Halas, let us breathe: When will these interest rate increases stop already? - Voila! money

2023-05-22T14:29:26.705Z

Highlights: Bank of Israel announces another increase of 0.25 percent. Business sector warns of collapses and the real estate market is not calm either. Bank of Israel notes that inflation is above the upper bound and encompasses a wide range of items. Psagot Investment House's chief economist Guy Beit Or says the interest rate effect has not yet been reflected in economic data, while domestic demand – consumption and investment – remains high. It is impossible to expect interest rate to rise from 0.1% to 4.75% within a year, and this will not have significant macroeconomic consequences.


Alongside the criticisms, the Bank of Israel's decision to raise the interest rate makes sense, but even if the latest announcement is a wink toward a pause, the implications of such an extreme increase are unclear


There are no speed bumps near the Bank of Israel (Photo: Reuven Castro)

The interest rate continues to rise, and with it the harsh criticism. After announcing another increase of 0.25 percent, the business sector is warning of collapses and the real estate market is not calm either." We must completely stop further interest rate increases and put the emphasis on curbing the cost side," said the president of the Association of Chambers of Commerce, Adv. Uriel Lin, "The government is attacking, without justification, the business sector because it is easy and populist while it does not do the minimum required in the public sector. Both the Bank of Israel and the Israeli government are making a serious mistake in putting all their faith in the fight against surging inflation and continuing to raise the bank interest rate."

Could this step really have been avoided and when will we still have calm?

"In the interest rate decision, the Bank of Israel knew how to balance the current intensity of economic activity and high inflation, and the signal they wanted to give the market that they are beginning to see signs of moderation in both economic activity and inflation," explains Guy Beit Or, Psagot Investment House's chief economist, "At least from the initial reading of the decision, it is clear that the Bank of Israel is trying to balance and may be preparing the markets for a halt in interest rate increases. In any case, they leave the door open and continue to adopt, as in the previous decision, a policy that will depend on current data.

Beit Or says that the Bank of Israel notes that inflation is above the upper bound and encompasses a wide range of items. "There's nothing new about this under the sun. However, they noted that looking at the past 3 and 6 months, it can be seen that the inflation rate is lower. In particular, we see the slowdown in the past three months, with an increase of 3.9 percent in the overall index and 4.4 percent in nontradable goods. With regard to inflation expectations, the Bank of Israel notes that as of the second year, they are all within the target range, and for the coming year they are indicated around the upper bound.

What about the housing market?

Beit Or adds that the Bank of Israel housing market continues to note that the sector is cooling, due to a decline in the number of transactions and mortgage performance, but in the meantime, rental prices continue their upward trend. "The Bank of Israel knows very well that the picture of the situation in the rental market does not represent what is happening in real time and reflects more of the picture in the past year. As time passes, the cooling of the housing market is expected to trickle down the housing component of the CPI."

So what's the conclusion? "The latest economic activity data published in Israel tell us that the interest rate effect has not yet been reflected in economic data, while domestic demand – consumption and investment – remains high. Of course, this should not really surprise us, since the effect of the interest rate on economic activity begins to be reflected in data between one and two years after the start of the interest rate increases. In order to see a real moderation in sticky inflation, a significant slowdown in economic activity is required, and in our assessment, a significant impact is yet to come, with the interest rate effect on the one hand, and high inflation on the other, eroding the purchasing power of Israeli households significantly.

"Will the data moderate at a sufficient pace so that the Bank of Israel does not raise the interest rate in July? As of today, this is still really unclear. At least in our assessment, at this stage it would be right for the Bank of Israel to wait and see how the interest rate effect seeps into the real economy before deciding on another increase move, which could put the Bank of Israel in policy error territory. It is impossible to expect the interest rate to rise from 0.1% to 4.75% within a year, and this will not have significant macroeconomic consequences. The interest rate effect is yet to come."

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Source: walla

All business articles on 2023-05-22

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