Press conference, Bank of Israel Governor Amir Yaron interest rate increase/Bank of Israel
In January of this year, households in Israel took out non-linked variable rate mortgages amounting to NIS 2.41 billion out of a total mortgage takeout of NIS 5.52 billion, i.e. about 44%.
The hopes of the mortgage holders that already in March of this year they would pay a quarter of a percent less annual interest on part of the mortgage, if the Bank of Israel had reduced the interest rate from 4.5% to 4.25%, were disappointed last Monday.
For the right reasons the Bank of Israel left the interest rate unchanged as we expected, contrary to the consensus of the forecasters who gave their forecasts to the Bloomberg agency as well as to the Reuters agency that the interest rate was expected to drop to 4.25%.
The public was disappointed by the central bank's decision.
The bank says that although inflation moderated to 2.6%, it is close to the upper part of the government's inflation target which is between 1%-3%, but there is great uncertainty regarding the ongoing war.
Yes, the war continues in the north and in the south with no end in sight.
The Bank of Israel says that the "Iron Swords" war has significant consequences for the real activity in the economy, therefore stability is important and in the meantime also interest rate stability.
Governor of the Bank of Israel Prof. Amir Yaron.
The mortgage payers will have to wait
Many factors of uncertainty
Economic activity in most countries in the world remains moderate, with the exception of the USA with relatively strong growth, according to the Bank of Israel. Inflation has moderated in some countries, but in most of them it still remains above the inflation target of the central banks. The interest rate path in Israel will be determined according to the continued convergence of the following factors; inflation , the stability in the financial markets, the economic activity and the budgetary policy of the government.
The central bank states in the review that it publishes, in connection with the interest rate that it left unchanged at 4.5%, that although there has been an economic recovery in recent months after the rupture of the "Iron Swords" war, there are still many factors of uncertainty and difficulties.
On the positive side, as the Bank of Israel and the Central Bureau of Statistics say, the labor market situation is good and indicates recovery, the unemployment rate in January was 3% after 2.7% in December. The labor force participation rate is good, 60.4% after 60.7% in December. The employed working at full capacity 77.2% after 76.4% in December. Please note, the number of vacancies increased in January to 126,367 after 107,554 in December.
Another positive phenomenon now after several months of war is the improvement in the use of credit cards which decreased by only 0.4% in the last quarter of 2023 after An increase of 2.1% in the third quarter of 2023 before the war.
What is particularly interesting is the increase in the last quarter of 2023 in the use of credit for buying food and beverages at an annual rate of 5.6% after an increase of 8.4% in the third quarter of 2023 and an increase in the purchase of services and products from fuel to computers, software and communication including medical services at an annual rate of 5.6% after an increase of 8.4 %.
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Shopping.
Recovery in public spending/ShutterStock, Ground Picture
Improvement in economic activity
Even without the official figures from the CBS and the Bank of Israel, today we can expect an increase in economic activity which is reflected in the renewal of the tradition of traffic jams on the roads, restaurants and cafeterias filling up, the renewal of trips abroad and also leisure vacations. Despite the intense fighting on the border of Lebanon and the Gaza Strip, life returns to normal within a The war, it was like that in the war of attrition after the Six Day War until the Yom Kippur war and it was like that in the war of liberation - while armored convoys went up to the besieged Jerusalem, the cafes in Tel Aviv worked well.
The survey of trends in economic activity according to the Central Bank improved, in January of this year there was a significant improvement in all industries, including an expectation of an improvement in tourist stays in hotels and a positive balance in the expectation of the construction industry, and also an expectation of an improvement in February in the service industry and an increase in employment and sales. The Bank of Israel's integrated index of the state of the economy indicates an improvement In January, at a rate of 0.3% following an increase of a similar rate in December, and this after a decrease of 0.6% in November and a fall of 2.4% in October, the month of the outbreak of the war.
The Bank of Israel also notes positively that despite the downgrading of Israel's credit rating and the expectations of Israel's credit rating by Moody's , the market reacted moderately and it is clear that the downgrade of Israel's credit rating had already been priced in. In this context, see the article I published on 2/16 regarding Moody's negligence which also lowered Israel's credit rating expectations.
The Israeli Stock Exchange.
Local stock indexes rose after a long shuffle/Ruben Castro
My performance is lacking
In the capital market, local stock indices rose after a long shuffle.
The Bank of Israel points out that there are still underperformances of the stock indices in Israel relative to the rest of the world from the beginning of 2023 and they are visible and significant.
We will add that the lag in stock prices in Israel began immediately with the beginning of the protests and demonstrations against the government in January 2023.
Another interesting point is that the gap that widened in the yield between the yield of government bonds and the bonds of the companies, corporations, returned and fell close to the level that was on the eve of the war, another sign of the strength of the sector the business
The yield on Israel's long-term government bonds has risen recently, as is the case all over the world, but less strongly.
It is true that the scope of credit for small and small businesses and households continues to decrease, but according to the Central Bank's trend survey for the month of January, it appears that the difficulty in obtaining credit has decreased and returned to the level before the war.
In contrast to the debit, there are negative effects pointed out by the central bank. Uncertainty in the economy is still very high, Israel's risk premium in the international financial markets, measured through CDS, is still at a high level. The spread between an American bond in dollars and an Israeli bond in dollars has not changed in the recent period, but remains at a high level.
The CDS actually indicates the cost of insuring debt payments of Israel as exists in varying degrees Credit Default Swap for any country that issues foreign currency in the world markets. Not only that - there are more than implicit criticisms of the government for its effect on inflation: fiscal and budgetary policies that are too expansive and have negative effects in the area of prices.
In simple language, the government increases the Its budget is at a rate that is beyond what is desirable even during a war and does not balance it sufficiently on the revenue side to prevent too large a budget deficit. The Bank of Israel's intention is that a home inspection should be carried out in the 2024 budget and of course the 2025 budget. The governor calls on the government to make structural changes and prioritize growth engines in fiscal activity.
The budget deficit has already risen to 4.8% and the budget approved by the government includes a forecast for a deficit of 6.6% in relation to GDP and is expected to lead to a GDP debt ratio of 67% already at the end of this year.
Although there is an improvement in tax collection in January this year, the collection is still realistically 4% lower compared to January last year.
There has been a certain increase in the credit risk indices in the various sectors, says the Bank of Israel, some of the loans for which the repayment was postponed in October with the outbreak of the war received an extension of the postponement period.
Construction Worker.
Severe shortage of foreign workers/image processing, Reuven Castro
Construction restrictions
Another deficit in the economy is the limitations in the construction sector which still poses a risk to the moderation of inflation.
The intention is that in the absence of construction due to a lack of foreign workers, the approval of their coming to Israel is delayed, some of it is carried out, the residential construction which also affects other industries is delayed.
We will add that due to the Israeli refugees from the north of the country and surrounding Israel, the demand for residences in the central areas, which is called in the vernacular Hadera-Gedera, has increased.
In January, rent prices for an apartment increased for those who renewed a contract by 2.7% and for new renters an increase of 3.2% in one month.
The volume of transactions in real estate and the performance of mortgages have stabilized at low levels compared to recent years, says the Bank of Israel.
Please note, the inflation of tradable products continues to decrease, referring to imported products and services. The tradable price index rose by only 1.5% in the past year. In contrast, the domestic price index, The non-tradable, i.e. those of a local nature, mainly from the housing and service sectors, is above the government's inflation target, and has increased by 3.2% in the last year.
This means that the government is unable to prevent price increases for local merchants and service providers in many areas. This point is interesting if we recall that the shekel has even strengthened in the past year, especially since the outbreak of the war against Hamas, the shekel has strengthened by more than 6%.
We were asked why the interministerial price committee does not announce a reduction in the price of bread under supervision after the price of wheat fell by 19% in the past year? Why are marketing chains being evasive? the bread under supervision from the shelves? All in all, the inflation forecast for the year ahead is close to the upper limit of the inflation target, expectations have risen recently after inflation actually fell to 2.6% in the 12 months to January.
The Bank of Israel says that for longer periods today's inflation forecast is within range The inflation target of 1%-3%, in the upper part.
Despite this, there is still uncertainty regarding the effects of the war on inflation.
Because of the "sticky" inflation in the world that we have not yet gotten rid of completely, most of the world's central banks are signaling that they are postponing the date of interest rate reductions and monetary easing.
Indeed, the Bank of Israel will have to wait and see that inflation has indeed decreased significantly before reducing the interest rate.
Jay Powell Governor of the US Central Bank, November 28, 2018/AP
Don't stay away from the US
The Bank of Israel cannot be too far from the interest rate in the US which is currently effectively 5.31%, a gap of 81 basis points which is 0.81% in favor of the American interest rate. A premature increase in the interest rate gap, in favor of the US, could lead to a renewed devaluation of the shekel and with it a rollover The upward inflation through the transmission mechanism which today is at least 25%, meaning that every 1% devaluation leads to inflation of a quarter of a percent, sometimes more.
At the moment there is no question in the US of reducing the interest rate before the month of May at the earliest, the deadline for a decision is May 1st, if at all it is decided to reduce the interest rate. Therefore, an interest rate reduction in Israel, if it happens, will not be before May 27th. We have very high price indices for the months of February, March , April of this year that at the very least they will make it difficult for the Bank of Israel to reduce the interest rate.
It is possible that in the coming months we will see a slight increase in the prices of apartments and taking out mortgages due to the influx of the book community about their families to the center of the country.
In the last month of November/December there was already a 0.7% increase in the price of apartments compared to a month before, a slight increase after eight consecutive months of price decline.
Maybe the continued increase in apartment prices will be temporary, maybe it will stabilize, it all depends on the scope of construction and there is also the pressure of the contractors to get rid of 67,760 apartments they have for sale, an all-time record.
The contractors must sell apartments as quickly as possible due to the pressure of the cost of capital and the cost of interest that they are obligated to hold such inventory, a cost that is not going to decrease both because of the increase in government bond yields, which are a reference point for the cost of taking loans by the contractors from the banks and because in the financial market the interest rate is not to go down so fast, as the Bank of Israel made clear this week to all the daydreamers.
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