Prepare your pocket: On Monday at 16:00, the Bank of Israel will announce the level of the interest rate in the economy. According to most forecasts, the federal funds rate is expected to rise by a quarter of a percentage point for the tenth consecutive time to 4.75 percent, a 17-year high. The Bank of Israel is raising the interest rate in order to moderate inflation, which in the meantime refuses to decline.
The Consumer Price Index (CPI) jumped 0.8 percent in April, twice as much as forecasts, keeping the annual inflation rate at 5 percent, similar to last month. This came as a surprise to economists, who had expected the inflation rate to moderate to 4.6 percent.
Similar to the rest of the world, inflation in Israel began to rise sharply at the beginning of last year due to the increase in commodity prices against the background of the war between Russia and Ukraine and the exit from the coronavirus crisis. While inflation in the US peaked at about 10%, in Israel the highest annual inflation rate was recorded in January – 5.4%. However, in the US, inflation has already begun to moderate, and as a result, the interest rate market expects the dollar interest rate to begin to decline in November of this year.
Prepare for change. Apartment mortgage, photo: Getty Images
In contrast, in Israel, inflation is more "stubborn," and as a result, the interest rate market now expects that the Bank of Israel will not be satisfied with raising the interest rate next week, but will be forced to raise it again at the beginning of July. In other words, the interest rate will rise to 5% from the current 4.5%. In addition, according to current forecasts, if there are no dramatic changes, it appears that the interest rate in Israel will remain high for an entire year, which does not arouse optimism among households with a mortgage.
Much less optimistic
It should be noted that about 40% of the average mortgage in Israel is linked to the prime interest rate (Bank of Israel interest rate + 1.5%), in contrast to the situation in the US, where most mortgages were granted at a fixed rate.
Since the publication of the last CPI, analysts have stopped being optimistic about inflation in Israel, especially in light of the fact that the wave of price increases in the economy in recent weeks has not yet been included in the calculation of the CPI for April. The high dollar exchange rate against the shekel, due to the political uncertainty surrounding the legal reform, also increases inflationary pressures.
"Unfortunately, this matter has been going on for longer than everyone would like," says Guy Beit Or, Psagot Investment House's chief economist, in a conversation with Israel Hayom, adding: "We are learning firsthand what 'sticky' and stubborn inflation is that remains around 5%. We're seeing all the announcements about food price increases, and it's very substantial, it's going to span the next three CPI readings – May, June, July. In other words, the food component of the CPI will continue to be high—which will keep inflation looking back at these levels, and even higher over the summer. Only towards the last quarter of the year are we expected to begin to see moderation in the annual inflation rate."
Mortgages (illustration), photo: GettyImages
When will the decline begin?
Modi Shafrir, chief financial markets strategist at Bank Hapoalim, said, "The expansion of the economy at a reasonable pace in the first quarter, combined with the increase in core inflation in April and the 'tight' employment market, support an increase in the Bank of Israel interest rate to 4.75 percent in the upcoming decision, with a considerable chance of another increase to 5.0 percent in July."
Shafrir adds, "We remain in our assessment that the Bank of Israel will then leave the interest rate at a restraining level for an extended period of time, and will lower the interest rate several months after the Fed."
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