The sharp growth recorded in the fourth quarter of 2022, the increase in the level of inflation and the depreciation of the shekel against the dollar led the Bank of Israel to raise the interest rate today (Monday) by 0.5% to 4.25% - for the eighth time in a row.
The governor of the Bank of Israel, Prof. Amir Yaron, said in an interview with "Israel Hayom" that he was a little surprised by the consumer price index data published last week, and that he is trying to reassure the households that are groaning under the swelling mortgage payments that "most of the increases are surely behind us."
Yaron repeatedly emphasized in the interview the importance of the independence of the Bank of Israel and other institutions.
Governor of the Bank of Israel, Prof. Amir Yaron, on a trip after raising the interest rate one more time // Photo: L.A.M.
Do you think you are close to ending interest rate increases at 4.5% or 4.75%? Will this be the end or do you see a reason to reach an interest rate similar to that of the US, which is currently priced to reach a peak of 5.25%?
"I think that as long as we don't see any unusual developments, and right now we still see, both we and those active in the market, the forecasters, predict that inflation will begin to decrease in the coming months. We are of course aware that the economy is still highly active, employment is high. The index surprised us and the rest the active slightly upwards.
"Beyond that, we see core inflation that seems a little more 'sticky', this is something we see in all developed economies. Therefore, the current decision of 50 basis points takes into account the balance between the risk of inflation and the moderation of activity in the economy. I think most increases are Certainly behind us, and we will of course continue to act solely according to the data."
Bank of Israel.
"We receive all the data", photo: Oren Ben Hakon
"Many tools in the arsenal"
In the announcement you mentioned the devaluation of the shekel as one of the reasons for inflation, how concerned are you about this and in which scenario will you intervene in the foreign exchange market?
"It is important to have some kind of perspective. I would say that in the last three months we have seen a very large volatility of the exchange rate, which has hovered around the level of 3.35 several times and also around 3.55 and above. In the last two and a half weeks, we have seen some kind of weakening of the relationship between the exchange rate and the performance of the US stock market .
"But this is a period that is so short and with a lot of noise around, that it is very difficult at the moment to point to any clear causality. But it is clear that as much as there is a devaluation of the shekel, it does not help us to eradicate inflation. Although the interest rate is, of course, the central, prominent, and horizontal tool to to eradicate inflation, but obviously we also have other tools in our arsenal, and if we need to we can also use them."
Finance Minister Smotrich reacts to the interest rate hike // Photo: Yehuda Schlesinger
Are you concerned about the warnings received from international bodies regarding Israel's credit rating if the legal reform is approved in its current form?
"I don't have a clear crystal ball exactly what will happen. I think it's quite clear from my statement in the finance committee that economic studies show that independent and strong institutions are an essential component for a prosperous and developed economy. That's why we see the international bodies, including the credit rating companies, diagnosing this and taking an interest in this issue. Therefore, as I said, it is extremely important to preserve these characteristics of strong and independent institutions in any process of their consolidation."
At the Bank of Israel you monitor the foreign exchange movements. Have you really seen a significant transfer of funds from Israel to abroad by foreign investors or by Israelis?
"Frequently, regardless of the recent events, we are in dialogue with the banking system and the financial system and we have data on these issues. Beyond that, at the macro level we receive all the data, as of now there is no unusual activity here."
Banks fear a drop in Israel's credit rating.
The American JP Morgan (archive), photo: AFP
Gafni's initiative - a mistake
There are initiatives in the Knesset to freeze mortgages. Minister Eli Cohen tweeted today that he asked the Minister of Finance to draw up an outline for stopping interest rate increases. Are you worried about all these attempts to interfere with your monetary policy making?
"First of all, we need to be precise, inflation has not moderated (referring to Minister Eli Cohen's tweet - SG).
And as I said our decision to raise 50 basis points is based, we look at all the data.
Regarding Gafni's initiative in the Knesset, although I assume that it comes from good motives, in the end it will only lead to more expensive mortgages, and it is clear that we do not want to harm the principle of the market and enter into central planning.
This is not only factually incorrect, it will also damage the image of the economy.
"That everyone understands the importance of independence in the central bank - in all the countries where there was damage to the central bank, we know what the final result was, it was a devastating result. I know that the decision makers understand that."
I asked my fellow Finance Minister Bezalel Smotrich to draw up an outline with the Governor of the Bank of Israel to stop interest rate increases.
Against the backdrop of moderate inflation, there was no justification for raising the interest rate today, which continues the indignation of mortgage holders.
— Eli Cohen
Eli Cohen (@elicoh1) February 20, 2023
Gaffney
It will only hurt the economy, photo: Oren Ben Hakon
"We know that inflation hurts the weak"
What can you say to the households that feel suffocated due to the rising cost of the mortgage - when will we see the end of the increase process?
"We understand the pain. I also want to mention that mortgages in Israel are given conservatively both in terms of the monthly payment and the amount of the loan. But it is impossible to lower inflation without some pain, it doesn't work any other way, so we are taking these steps. The pain today is to prevent Bigger pain tomorrow.We know that inflation hits first and foremost the weak.
"Our figure regarding the increase in the monthly repayment for those who have taken out a mortgage in the last five years is on average slightly below NIS 600, but we still know that there is a very large range. The loans are generally given in a conservative manner, and I welcome the steps taken today by two banks - Discount and Mizrachi. The Bank of Israel is always in constant dialogue with the banking system in the context of the treatment of households."
The mortgage market.
"Understand the pain", photo: GettyImages
Bank of Israel.
"The central bank is in constant dialogue with the banking system", photo: Kontakt
Your term will end at the end of the year, have you already thought about the request to extend?
First of all, this is a term full of action - I think there has never been a term with so many events - starting with Wall Guard, so many rounds of elections, various ministers and heads of government, the corona virus of course and the war in Ukraine.
I am fully engaged in promoting the economy, maintaining the economy, eradicating inflation, talking with the international bodies, and providing the insights needed for the benefit of the economy.
In any case, I will make my decision whether to continue during the year."
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