The economic consequences of the government's attempts to pass legal reform without consultation continue to pile up.
The withdrawal of funds abroad, which began in trickles, may continue. As a result, the dollar has already jumped against the shekel in the last month from NIS 3.40 to the dollar to NIS 3.67 today.
Supporters of the reform are trying to calm the spirits by saying that these are temporary phenomena and that the return path of the shekel and the exchange rates will be short and fast once the compromise is reached, but as of now this is not the case, and the dollar has meanwhile "settled" well in the high areas, close to the level of 3.70.
The high dollar has already caused the Electricity Authority to announce this week that despite the dive of coal prices by tens of percent, the electricity tariff will only decrease by 2%.
In addition to this, the candy importer Layman Schlissel announced this week that for the same reason the imported products will be more expensive by 6-7%, and the rest, as they say, will come if the dollar continues to rise.
Bank of Israel, photo: Oren Ben Hakon
The weak shekel has already caused the upward revision of the inflation forecasts and the Bank of Israel interest rate forecasts accordingly.
If until a month or two ago, most economists believed that the Bank of Israel's interest rate would peak at 4%, today the interest rate market estimates that the Governor will raise the interest rate from the current level of 4.25% to 4.75% in April and another 0.25% in May, and possibly even beyond that in July .
That is, according to current forecasts in the interest rate market, the Bank of Israel interest rate is expected to reach a level of 5% within two months, which will raise the prime interest rate to 6.5%.
Apart from the unbearable burden that will be added to the borrowers as a result, an interest rate of 5% may have heavy consequences on the economy, primarily a moderation in economic activity.
"At an interest rate of 5%, real estate stops, and the rest of the economy stops.
The state's income from taxes will not come close to what the treasury expects," a veteran source in the capital market told us.
"Is Bibi running on the cost of living? So the financing of the kindergartens and the addition of credit points has a cost, and he may find it difficult to finance this cost with an economy that slips out of his hands because of the legislation. In the world of reality, one has to choose either legislation that suits them or an economy that will allow them to bring to their voters what that they were promised," he adds.
Definitely a reasonable option
Whether it is a dire forecast or not, it is important to understand that an interest rate of 5% or more is a reasonable possibility, which is already priced in the interest rate market today.
It is better for the decision makers to understand that the lack of communication and the deep rift in the people may cause economic damage that will take a long time to repair, including an increase in the cost of living.
This, even before we talked about the possibility of lowering Israel's credit rating, which would boost the state's debt repayments.
The Fitch company issued a severe warning to the decision makers this week.
"The reform may have a negative impact on Israel's credit profile by weakening the government's indicators or to the extent that the weakening of balances and institutional brakes lead to worse policy outcomes or to persistent negative investor sentiment," the company's economists wrote.
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