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The Bank of Israel raised the interest rate by 0.75%, which will stand at 2% Israel today

2022-08-22T13:07:56.132Z


This is the highest level of interest since August 2013 • Chen Herzog, the chief economist of the consulting firm BDO told "Israel Hayom": "The increase in interest rates is inevitable"


The fight against the cost of living:

The Bank of Israel raised today (Monday) the interest rate in the economy by 0.75%.

This increase comes after last July the bank increased the interest rate in the economy by 0.5%, so that the interest rate reached the level of 1.25%, the highest interest level since August 2013 and after for years the interest rate in the economy was close to zero. 

Earlier, last April it was decided to increase the interest rate by 0.25% to 0.35% and last May the Bank of Israel decided to increase the interest rate by 0.4% from 0.35% to 0.75%.

Chen Herzog, the chief economist of the consulting firm BDO, told "Israel Today": "Ultimately, the trend of interest rate increases is inevitable in light of the rise in the price level and in light of inflation in Israel. At the same time, it should be remembered that a significant part of the inflation level stems from international factors, which are not influenced In general, by the Bank of Israel's interest rate policy. The interest rate in Israel does not affect the prices of fuel in the world, coal, wheat, sea transport. These are all those global factors that were affected, among other things, as a result of the war in Ukraine, which strengthened the inflationary outbreak.

Chen Herzog, photo: Nati Hadad

Therefore, the fear is that an overly aggressive interest rate increase, on the one hand, will slow down growth in Israel, harm the cost of living due to the increase in mortgages and loans, and on the other hand, will not help significantly in dealing with the inflation that is imported from abroad. , energy independence, reducing dependence on imports and dealing with the wave of inflation. The problem is that dealing with inflation only with a single policy tool of raising interest rates is ineffective and, as mentioned, also indirectly harms the cost of living due to the increase in mortgages and loans."

Regarding the effect of the increase in interest rates on the cost of living, Herzog said, "The main challenge of the cost of living in Israel, especially for the middle class, is housing prices. This is the greatest financial burden for the family and the most significant challenge for young couples. Therefore, in a situation where housing prices continue to rise, since no effective policy has been formulated to address the problem housing and at the same time raising the interest rate that makes mortgages more expensive, this further distances the young couples from the ability to purchase the apartment. This policy worsens the economic challenge and the cost of living plight of the middle class public and of the young couples."

The short-term effect: rising prices in the economy

To the question of whether the interest rate is expected to rise further, Herzog replied: "The continuation of the interest rate trend depends, among other things, on global trends and on the rate of price increases. I estimate that we will see further interest rate increases ahead of us. I think that the policy of the Bank of Israel should be for more moderate and measured interest rate increases, compared to the US , because of Israel's unique conditions."

As for the comparison of Israel compared to the rest of the world, "overall, the level of inflation in Israel, even after it passed 4% and is approaching 5%, is still low compared to inflation in the US and Europe.

The meaning of the interest rate increase for us consumers is that, as mentioned, it makes the mortgages, the overdraft interest, the loans, the purchase costs of the leasing vehicles and all the credit-based activity in the consumer economy more expensive, therefore tomorrow morning the interest rate increase causes an increase in the cost of living.

The hope is that eventually over time, the increase in interest rates will bring a halt to the rise in prices and contribute to the cost of living.

But this is future, and tomorrow morning the effect is the price increase.

The month of August is a month in which, on the one hand, fuel prices fell due to a drop in prices in the world and because of the tax reduction in Israel.

On the other hand, electricity has become more expensive and the price of milk is controlled.

The wave of price increases is not behind us yet.

The effects of price increases in the world sometimes affect us only after a month or two."

Alex Zabzinski, Meitav's chief economist, also believes that this is not the latest interest rate increase and in his opinion it is an inevitable move.

According to him, "We will see more increases. In the end, this is an examination of harm versus benefit. The increase in interest rates has a negative effect on those who have a loan, but there is a need to curb inflation because inflation is a dangerous thing, which makes every service and every product more expensive and raises the cost of living over time and that can get out of control. It is important that the Bank of Israel makes every effort to curb inflation. If it discovers that it is possible to lower the interest rate after inflation has fallen, the interest rate can be lowered to lower levels. In addition, it is also meaningful for those who have a deposit in the bank, that they will receive interest higher".

Alex Zebzinski, photo: Nati Hadad

To the question of how much this will hurt the middle class, he answered "If we take for example people from the middle class at the beginning of their journey, who bought an apartment not long ago, then it is likely that some of them have a mortgage with a variable interest rate. This affects their monthly repayment. If, for example, they have a mortgage in the amount of 500,000 Shekels with a variable interest rate linked to the prime and the prime interest rate will rise by half a percent, so the annual repayment due to the increase in interest will increase by 2,500 shekels per year. By monthly calculation, this results in an increase of about 200 shekels a month. Will 200 shekels a month destroy the middle class? It must be difficult for him, But I don't think it will destroy."

Chairman of the Presidency of the Business Sector, Dobi Amitai, photo: Koko

According to Dobi Amitai, chairman of the presidency of the business sector: "The Bank of Israel did well to react quickly and raise the interest rate, but such a move should be accompanied by a correct physical policy that will help curb inflation."

He further added: "Along with the Bank of Israel, which is responsible for monetary policy, the Ministry of Finance, which is responsible for fiscal-budgetary policy, must take policy measures that can help curb the growing inflation, and build the infrastructure for the economy's next growth cycle. It is important to remember that the purpose of raising interest rates is to cool the economy and lower demands, while lowering private consumption. At the same time, this move increases credit costs for businesses, so the government must act to lower production costs." 

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Source: israelhayom

All news articles on 2022-08-22

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