The Bank of Israel is expected to change today (Monday), for the first time in two years, the current interest rate of 0.1%.
The interest rate market expects that this is not the last increase, and in fact the interest rate will rise by a quarter of a percent at each meeting of the Monetary Committee, so that by the end of 2022 the interest rate will reach 1.75%.
The change in the trend that is emerging has many implications - for households, the capital market, the foreign exchange market, etc. In preparation for the dramatic decision, "Israel Today" presents you with all the information you need to know.
How much will the interest rate increase?
Most economists expect the interest rate to rise to 0.25% today, few of them expect a sharper rise to 0.5%.
At the same time, most forecasts predict a continued rise in interest rates by a quarter of a percent in each of the next 12 months.
Why is the Bank of Israel raising the interest rate?
The main reason for the expected move is the high inflation in the economy.
Or, in other words, the rate of price increase exceeded the Bank of Israel's target range and reached 3.5% per year in February.
According to forecasts, the peak is still ahead of us - inflation is expected to worsen in the coming months and reach 4.3% in June, and only then will it start to fall.
The rise in prices in the economy is not unique to Israel but a global phenomenon, which began with the exit from the corona crisis and the increase in demand for various raw materials, and worsened following the war in Ukraine.
By comparison, US inflation has already crossed the 7% level, and the US Federal Reserve has already begun a round of interest rate hikes - which is expected to rise at least six more times this year. % Per year.
Another reason that supports raising the interest rate is the jump in the annual rate of 13% in apartment prices, while the low interest rate prevailing in the economy allows favorable financial conditions for obtaining mortgages (see article on the left) and thus fuels demand for apartments.
Bank of Israel interest rate (daily) in the years 2021-2008, Source: Bank of Israel website
Is the bank late and opens the round of raises too late?
The Bank of Israel believed that inflation, which had begun to rise in recent months, was temporary and would soon pass, but then came the war in Ukraine, which exacerbated the situation: the price of oil jumped to more than $ 100 a barrel, and many commodities, including wheat, rose.
At the same time, the rate of increase in housing prices that is not expected to fall soon, and the macroeconomic indices in the economy - such as strong growth on the one hand, and low unemployment on the other - now also support a round of interest rate hikes, seems to be the right timing.
Beyond that, the central bank knows that the rise in interest rates will hurt households following the increase in mortgage repayments, which are the largest monthly expenditure of an average household.
It is possible that this consideration has so far prevented the bank from raising the interest rate, and it is not inconceivable that it will in the future affect the increase in the gradual process.
How will the move affect the dollar against the shekel?
Apparently, the move by the Bank of Israel is expected to strengthen the shekel, but, as mentioned, the process of raising interest rates on the dollar has already begun and is expected to be sharper than in Israel.
Therefore, raising the interest rate to 0.25% should not affect the dollar-shekel exchange rate at all, and if the bank raises it to half a percent - this may strengthen the shekel in the short term.
However, it should be noted that the shekel exchange rate against the dollar is generally affected less by interest rate differentials and more by the real flow - that is, the amount of foreign currency entering against the one leaving the economy.
How will the indices on the stock exchange be affected?
The Israeli capital market today is mainly affected by what is happening in the US and the technology sector in Israel. At the same time, the real interest rate in Israel - the gap between the interest rate and the inflation rate - is still very low, which supports stock market rises.
In addition, stock prices already embody the process of raising the interest rate on the shekel, so it can be said that if there are no surprises - such as raising the interest rate to half a percent or leaving the interest rate unchanged - the central bank's move is unlikely to affect indexes on the Israel Stock Exchange.
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