Federal Reserve Chairman Jerome Powell. Delays his decision and gives his Israeli counterpart room to maneuver he doubts he wanted/Getty Images, Drew Angerer
Not only the heads of state of the United States and Israel met last night, but also the two governors of the central banks of both countries. They may not have exchanged handshakes and courtesy, but just like the American president and the Israeli prime minister, they left room for interpretation of what we can expect in the near future.
Ostensibly, each central bank conducts its own policy in accordance with what is happening in the local economy. In fact, the Governor of the Bank of Israel has little choice but to follow his US counterpart, Federal Reserve Chairman Jerome Powell, since he cannot afford too large interest rate differentials between the US and Israeli markets.
The last time Prof. Amir Yaron raised the interest rate in the economy to 4.75% (i.e., the prime interest rate, which determines our credit, from mortgages to the outstanding balance, the "minus" in the account, as well as credit to businesses, of 6.25%). Since then, for two consecutive interest rate decisions, following low indices indicating a decline in inflation, he has frozen interest rate increases.
The US governor was more determined: despite the moderation of inflation in the US economy, he set the interest rate (at the end of July) at 5.5 percent, and even hinted that he would not hesitate to revise it further upward, if he felt that inflation was rearing its head again. Had he done so, he would have left Prof. Yaron with no choice, ahead of his next interest rate decision, on October 23, about two weeks after the Sukkot holiday, but to raise the interest rate by at least 10.0 percent, if not more. Powell's decision to rest a bit on the fence and wait for clearer macro data blunted the need for an increase.
Prof. Amir Yaron. Will personal desire affect professional consideration? Answers. September index could be the decisive parameter/image processing, Reuters
Nonetheless, chances are that the Governor will raise the interest rate: the shekel may have stabilized at around 3.82 (as of this morning), but still, it continues to creep up slowly. Moreover, the surge in gasoline prices brought it to a peak that, on a cloudy day, is reminiscent of the bad months after the Russian invasion of Ukraine (it's still a long way away, but you can say that North America and Europe are praying that winter won't come early this year, otherwise it could still reach around $100 a barrel), only highlighted the pent-up inflation in gas prices in Israel:
the government that is exposed to criticism for its resounding failure in the war on the cost of living, I want to keep holding on to the current price, but this task is getting harder by the day.
Moreover, it is estimated that after the holidays, the prices of some products will increase further, and importers, manufacturers and retailers did not want to raise their prices before Rosh Hashanah, when they are exposed to measurements and comparisons of holiday shopping baskets.
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Prime Minister and Governor of the Bank of Israel. At the moment, it seems that both of them want R. Yaron to continue for another term / Amos Ben Gershom, GPO
The governor also faces a personal dilemma: "After the holidays" is also the time zone in which we will talk to the prime minister to discuss his continuation in office. The prime minister has an interest in the governor remaining in office, which could help in the war of attrition over Israel's credit rating, since Prof. Yaron is highly regarded internationally.
If the governor wants the job, he may (or might, depending on who you ask) delay his decision a bit until late November, when the next term will already be in his lap (if the term is not extended, a new governor will step into his shoes on January 1).
Ostensibly, the decision is supposed to be purely professional, that is, devoid of personal considerations, but this is what it says: "If in the cedars...": Jerome Powell could have curbed inflation in the US while it was almost negligible, but waited with his interest rate decision to win another term.
What could be chess as far as the Governor is concerned? One parameter is the September CPI, which will be published 8 days before the interest rate decision. A high index, which would keep inflation above 4% (currently the annual inflation rate is 4.1%), is "only" one percentage point above the upper limit of the inflation range set by the bank, but in fact twice its desired rate, no more than 2%. Another parameter is the continued depreciation of the shekel against major currencies around the world—a rate of 3.9, for example (we were already at 3.87), will almost certainly lead to an increase in the interest rate.
The contractors are desperate. For some, rising interest rates could be a death blow/ShutterStock
Not only the political system is looking towards October 23, but also, for example, in the real estate industry: the continued increase in the interest rate will further burden contractors who consume credit, who are already struggling to cope with expensive credit and the decline in demand (due to the increase in mortgages for home buyers and alternative investment channels that are much more attractive to the investor sector).
It will also weigh heavily on businesses, with an emphasis on the little ones who live from hand to mouth, sometimes "rolling on the cycle." These businesses are still struggling to meet the high cost of credit (which sometimes leads to the banks' refusal to provide them with additional credit) as evidenced by the surge in the number of small and medium-sized businesses closing.
There are other considerations one way or the other, such as a political drama that will create a constitutional crisis (so far it seems that this danger has been postponed, even if it has not passed) or a strong labor market (unemployment is at a historic low of 10.3%) that can withstand another interest rate increase, but these are only secondary considerations.
One thing is clear: if the American president's meeting with the Israeli prime minister released a big sigh of relief around the prime minister, then the "governors' meeting" (although not face-to-face) increases the pressure on the Israeli governor, who may have hoped that one way or the other, his American counterpart would pull the chestnuts out of the fire for him and leave him no choice. Recall that it is often much more difficult to be independent than a trailer.
- More on the subject:
- Jerome Powell
- Amir Yaron
- Governor of the Bank of Israel
- US interest rate
- Interest rates in the economy