Following the interest rate hike in the US and by the Bank of England, we asked Chen Herzog, chief economist of the accounting firm BDO, what the consequences will be for us, the consumers, if the Bank of Israel decides to raise the interest rate in Israel.
Does the Bank of Israel not have to raise interest rates to stop inflation in Israel?
The upward trend in prices is mainly due to the rise in commodity prices in the world market - wheat, oil and maritime transport.
Israel as a small country has no ability to influence world commodity prices, so raising interest rates in Israel will not help stop prices from rising.
The rise in the prices of bread, petrol, water and electricity is in fact due to a global rise in prices, and is not related to interest rates in Israel.
And what about apartment prices?
The problem of housing prices in Israel is mainly a problem on the part of supply.
As long as the rate of construction starts is lower than the rate of population growth, prices will continue to rise.
Raising interest rates will only increase the price of mortgages and hurt the cost of living, and it cannot have a long-term effect on housing prices in the country.
What will happen if interest rates rise in Israel - which areas will be affected?
The immediate effect of raising interest rates in Israel will actually be to raise the cost of living.
Raising interest rates will cause mortgages to rise, as well as rising interest rates on overdraft and rising leasing vehicle prices.
Raising interest rates will also increase the price of basic products under supervision over time, since the cost of interest is one of the components included in the basket of regulated costs.
The purpose of raising interest rates is to "cool" the economy and slow down demand, in order to reduce inflationary pressures.
An economic slowdown will affect all sectors of the economy, hurt the growth and profitability of companies, and may even lead to a real erosion of workers' wages.
Who will still benefit from the interest rate increase?
The increase in interest rates is intended to increase the price of money, thus reducing consumption today and encouraging long-term investments and savings.
That is why peaceful households lose money, because loans are more expensive, and on the other hand long-term savings become more attractive.
So what should the Bank of Israel do now?
The Bank of Israel must continue to monitor developments.
In the current situation, and as long as inflation in Israel stems from global trends beyond our control, the Bank of Israel has no reason to raise interest rates immediately in Israel.
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