Bank of Israel increased the basic interest rate by 0.25% to 0.35% for the first time in 3.5 years

The Bank of Israel, headed by the Governor, Prof. Amir Yaron, announced today (Monday) an increase in the basic interest rate in the economy from 0.1% to 0.35%. In doing so, the predictions were confirmed that the Monetary Committee is expected to raise interest rates for the first time in three and a half years. Some experts even thought that the bank might raise the interest rate to 0.5% at once, but this forecast did not materialize. Following the increase in the basic interest rate, the prime interest rate will also rise this coming Thursday, after the banks are preparing for a change, from a rate of 1.6% per year to 1.85%.
Meanwhile, the Bank of Israel has published its updated macroeconomic forecast, according to which the interest rate is expected to stand at 1.5% in a year. The Bank believes that the inflation rate is expected to be 3.6% in 2022, higher than the previous forecast of 2 percentage points, and in 2023 it is expected to be 2%. In addition, GDP is expected to grow at a rate of 5.5% this year and at a rate of 4% next year.
At the press conference held by the bank after the announcement, Governor Yaron said that "the interest rate tool is a horizontal tool. We believe that given the productivity in the economy, the firms will be able to contain it and there will be no real harm in terms of the average economy." It's not what will change, but we thought it was the right dose for starting the gradual process of raising interest rates. We are in a different place from other countries in terms of inflation, so this is the right place for us.
"We have been in the process of monetary reduction for several months now, but in recent months there have been a number of very significant events that have accelerated the process so we have also accelerated it."
 As for the meaning of raising the interest rate on the housing market, "the price of raising the interest rate will amount to several tens of shekels a month in the mortgage. However, the price of not raising the interest rate can be even higher for index-linked mortgage borrowers. And they were done while being able to verify even with taking into account an interest rate hike far beyond the current level.
"As for the prime interest rate - this is something that was right to do beyond Corona. It gives a range of options and precisely during this period it is possible for many young couples to enter this market. Although the limit has moved from one third to two thirds % ".
In recent months, the Bank of Israel has refrained from raising interest rates, despite rising inflation in Israel and around the world. This is despite the fact that the UK has already raised it three times in a few weeks, and the US Federal Reserve has raised the interest rate to 0.25% to 0.5% and the US Governor even said recently that there will be a number of interest rate hikes this year. "In probably three increases from 0.75% -1% per year to the end of 2022.
The last time the interest rate in Israel was changed was during the first closure in the Corona crisis, when the interest rate was reduced from 0.25% to 0.1% to help the entire population and businesses. It was also the only time that the Bank of Israel changed the interest rate since the appointment of Prof. Yaron as Governor of the Bank of Israel at the end of 2018, more than three years ago.
Now, with rising inflation in almost all countries, the question in the various countries is not whether to raise interest rates, but only when. And that has been the question in Israel to this day.
The last time the interest rate was raised in Israel was a month before the start of Prof. Yaron's tenure as governor, when the deputy governor, Dr. Nadine Bodo-Trachtenberg, surprisingly raised the basic interest rate in Israel from 0.1% to 0.25% during her sole tenure. A month after Prof. Karnit Flug, the previous governor, resigned at the end of her five years in office, the new governor, Prof. Amir Yaron Shmona, has not yet taken office.
The rise in interest rates will now strengthen the shekel, contrary to the Bank of Israel's tendencies to protect exporters, but is expected to moderate the rising demand for apartments, which have already risen in price in recent years by a record 13%. A rise in interest rates is also expected to curb consumption and the many price increases that have taken place recently.
It is worth noting that the banks have already internalized that raising interest rates is imminent and have therefore very recently raised the various interest rates they charge on loans. The prime interest rate will always rise to a rate of 1.5% beyond the basic interest rate. So far, the Bank of Israel's interest rate has been 0.1% per year, so the prime interest rate was 1.6%.