The Bank of Israel has decided to raise the interest rate by 0.5%, so that the prime interest rate for households in Israel will be 2.75%.
The increase in interest rates in Israel is not much different from the route of interest rate increases that takes place in the leading economies in the world.
The Federal Reserve, the US Federal Reserve, decided a few weeks ago to raise the US interest rate by 0.75% to 1.75%.
The situation in the EU economy is also similar after the European Central Bank recently announced that it intends to raise the interest rate in July by 0.25% and make another 0.25% increase in September, from the zero level at which it is.
The Bank of England also recently raised interest rates from 0.25% to 1.25%.
The main reason for all the interest rate hikes is the inflation that has risen in the world.
The U.S. consumer price index has jumped about 8 percent in the past year - the highest rate in 40 years.
In the EU countries, too, inflation has climbed at a similar rate.
In Israel, the situation is better and the data of the consumer price index for May reflect annual inflation of about 4%.
Regardless of inflation, Israel is facing a problem of high prices relative to the world, and the challenge facing the government that will arise is to persevere with reforms that work to lower the cost of living - and this is relevant to situations where there is or is not inflation.
The main reforms that the government must make are the removal of bureaucratic barriers such as opening the market to imports (including agricultural products) and removing standards and barriers to importers, increasing competitiveness in Israel mainly by weakening monopolies, increasing banking banking in accordance with the cable conference, increasing construction supply in Israel. Rampage and give wage increases in the public sector.
The sharp rise in prices around the world, for which the global interest rate hike began, stems from several factors: In part of the supply there are still difficulties in the supply chains that create a bottleneck, from the war between Russia and Ukraine and the sanctions imposed on Russian oil in the West.
The impact of the closures imposed by China on large areas in an attempt to deal with renewed outbreaks of the corona virus is also evident.
On the demand side, many countries, including Israel, gave large sums of money to residents during the corona, mainly for fear of reaching a crisis similar to the crisis in 2008. There were sectors that were not affected at all, such as public sector workers, and sectors that flourished during this period - such as the high-tech sector.
Their purchasing power has created subdued demand that is now erupting.
In addition, there is a problem on the supply side: in the reduced manpower and in some professions that are short of workers.
In view of the above, the Bank of Israel does not have many choices and must raise interest rates, because if it does not do so - this will have an effect on demand, the exchange rate and, of course, inflation.
As for the Israeli real estate market, the decline in demand may have a cooling effect on selling prices and from there it may indirectly affect inflation, since housing prices in Israel are not directly included in the consumer price index but only rental prices, and the effect of interest rates on them will not be immediate.
Prof. Asher Blass is a former chief economist at the Bank of Israel, and currently a lecturer in economics at Ashkelon College.
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