"Apparently we have not yet finished the process of raising the interest rate" | Israel today

You raised the interest rate and inflation is not decreasing, and according to the forecasts it will continue to increase in the coming months.

"The process of the interest rate influencing inflation takes time - between six months and a year. It's not that you raise the interest rate, and immediately the inflation goes down. One of the challenges in monetary policy is that you have control over a significant policy tool - the interest rate - which takes time until it works, and in the meantime the world changes and needs to be evaluated By how much will you need to change the policy.

"Regarding inflation, we currently know that in the coming months inflation will remain at a level of 5% and maybe even more, and only towards February-March it should start to decrease. The annual inflation rate is measured in comparison to a year ago, and we know that last year there was an increase in inflation in the winter months. So as long as There is no dramatic event, inflation should start to decrease when these indices come out."

Andrew Abir, photo: Bank of Israel

You said it takes time for the interest rate to have an effect.

In light of the fact that we are nearing the end of the increases, would you consider increasing at a slower rate of 0.25% instead of large increases of 0.50%?

"In terms of the dose of the interest rate increases, we always look at all the data and the entire economy and we decide what the right dose is. I would emphasize that this is a process and apparently we have not yet finished the process of raising the interest rate. We still think that more monetary restraint is needed to lower inflation. The rate of raising The interest rate will of course be determined according to the activity data and the development of inflation.

New apartments under construction, photo: Dodo Greenspan

We are in the highest inflation environment since the 1980s in the world and in Israel.

And our challenge is to return inflation as quickly as possible to the target so that the people do not have to deal with the reality of 5-6-7%.

As the length of time outside the inflation target increases, people will begin to doubt the central bank's ability to bring inflation back to the target, and they will begin to take this into account in their economic decisions - whether it is in wage negotiations, whether it is in setting prices, then the price of lowering inflation will be high Higher. You have to understand: a stable economy needs stable prices, and we are committed to that.

Necessary steps are taken

"If we go back to the 1980s, then it was necessary to raise interest rates to much higher levels in order to lower inflation from 10% and more to below 5%. We do not want to be in such a situation. Therefore, we know that the steps we are taking today have They have a price, it hurts people - everyone who has a mortgage feels it - we are aware of it, but if we don't act now the price the citizen will pay in the future will be much higher."

The Bank of Israel is an independent body, but next week you will be required to give explanations to the Knesset about the interest rate.

Aren't you afraid that this will not end only with the presentation of the policy, but perhaps also with attempts in the future to intervene in the bank's activities?

"You have to separate two things, we are an independent body and it is one of the most important conditions for a modern economy to have an independent central bank, but that does not mean that we do not have to explain to the public and the Knesset what we are doing. On the contrary, we are happy to appear before Knesset committees, in the media, at conferences and in other places To explain our policy and why we are raising the interest rate. I think it is also their duty as elected officials to ask."

You emphasized in the interest rate decision that the Israeli economy is solid, how will the economic situation in the US and Europe affect the Israeli economy?

"First of all, there is a difference between the economies of Europe and the USA.

In the US the situation is much better than in Europe, it is true that there is a slowdown there, but Europe has much more significant challenges mainly because of their dependence on cheap energy from Russia. Therefore, it is quite likely that growth in Europe will be much lower than in the US.

These two economies, the American and the European, affect us.

One of the engines for our growth is exports, and if there is a significant slowdown in growth in the world, it will hurt our exports.

However, it should be noted that our exports in recent years have been less affected by what is happening in the world because the products we sell are mainly in the high-tech sector which was less affected by the Corona period.

Today we see a slowdown in the high-tech sector as well, and this can certainly affect the Israeli economy, but we still think that the Israeli economy is solid and at a high level of activity.

We are not thinking about a recession in Israel, we are thinking about a slowdown from the high levels we have seen in the last two years."

affects everyone

In the US, the vast majority of mortgages are at a fixed interest rate for 30 years, so interest rate increases by the Fed do not quickly affect the consumer's situation, here in Israel more than 40% of mortgages are at prime interest rates. Aren't you worried about the financial stability of Israeli households?

"The difference between Israel and the USA is that the increase in interest rates affects not only those who are about to take out a mortgage, but also those who have taken out a mortgage.

In Israel, even those who took out a mortgage five years ago feel it because the part adjacent to the prime has become more expensive.

In terms of the stability of households in Israel - specifically the restrictions in Israel for those who take out a mortgage are very strict compared to the rest of the world - I am talking about the ratio of payment to income - and this is not to protect the banks, but mainly to protect the consumer so that he is not too exposed to interest rate increases.

A shopping cart in a supermarket.

Many prices have become more expensive, photo: Yehoshua Yosef

Someone who took out a mortgage five years ago is less affected than someone who took out a mortgage a year ago, but even someone who took out a year ago was limited to how much they could take out and what their exposure capacity was."

"There is downward momentum"

How much of a gap do you think there should be in the final interest rate between the Fed and the Bank of Israel?

"We have no idea why the gap between the Bank of Israel's interest rate and the Fed's interest rate should be, it depends on what happens with our inflation and it depends on what happens with their inflation. They have much higher inflation, so you expect in advance that their interest rate will be higher in order to lower her".

In the USA, the high interest rate has already started to slow down the increases in the housing market, why isn't this happening in Israel?

"I'm not sure that interest rates in Israel don't affect the housing market. It's true that the way the Central Bank measures prices we still don't see a drop, but we hear that instead of lowering the price, the contractors are giving benefits that are equivalent to the price drop.

That's why I think there is momentum here for at least a slowdown in the rate of housing price increases.

If the new government keeps up the pace of new construction starts that have been in the past year, I think we will see the effect on apartment prices.

The public needs to understand that the next government that comes in is determined to continue the high rate of construction, and this will eventually set the tone and we will see a moderation in apartment prices."

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