Bank of Israel decided to raise the interest rate in the economy by 50 basis points to 3.75%

Bank of Israel announced on Monday another interest rate increase and the seventh in a row, at a rate of 0.5% - in accordance with the upper range of the estimates. In doing so, the basic interest rate in Israel will rise to 3.75% and the prime interest rate will rise accordingly to 5.25% - the highest since 2008. Meaning: an additional increase in the price of a large part of the loans, of the interest on the minus and of the part of the mortgages that is adjacent to the prime rate.
According to the updated forecast published alongside the interest rate decision, the Bank of Israel lowered the growth forecast for the Israeli economy, according to which this year it will amount to a rate of only 2.8% - 0.2% less than the previous forecast - and a rate of 3.5% in 2024.
At the Bank of Israel's press conference, Governor Prof. Amir Yaron said, "It is important that the incoming government behaves with the required responsibility in regards to fiscal policy, especially in spending whose purpose is not to support sustainable growth. I have said in the past that one of Israel's strategic assets is the low debt-to-GDP ratio of the economy, which served us faithfully even during the corona crisis.
"In the coming period, budget discussions will begin, concrete proposals will be put on the table and the government's intentions will be clarified. I believe that these will be fiscally responsible decisions, encouraging growth and those that will benefit the entire population. We at the Bank of Israel will continue to act as economic advisors for the government, and reflect to it in the most professional and responsible manner Our position regarding the steps you request to take.
The Bank of Israel Governor's decision to raise the interest rate by 0.5% increases the monthly repayment on an existing mortgage by NIS 131 - and completes an increase of NIS 876 in mortgage repayments within eight months, with the possibility of another increase in the coming months.
"It is important to remember that it is not for nothing that the Israeli economy receives high evaluations from the rating bodies and international institutions with which I am in constant contact. This has been achieved thanks to the long and blessed path we have taken with the effort of many years and our transformation into an advanced economy. As a small and open economy that maintains a reciprocal relationship with the largest economies in the world, The continued trust of the markets and the various factors in the global economy is essential for the Israeli economy in order for it to have a stable and safe business and financial environment."
The central bank also predicts that the budget deficit will be lower than the deficit ceiling established by law and that the tax burden will decrease in 2023-24 compared to the burden in 2022 and will be similar to what it was in 2021.
The Association of Mortgage Advisors states that "the significant increase in the monthly repayment, which is expected to continue in the coming months, will bring the repayment ratio of many households closer to 40% of their monthly income, a threshold that is considered dangerous and expresses a real difficulty for households to meet their mortgage payments over time.
"If you add to this difficult figure the fact that some households are forced to take non-bank or retail loans to purchase an apartment or to pay the construction input indices, a much more difficult picture emerges. The sharp jump in the monthly repayment of many households must be a priority of the new government At the same time, there is no doubt that the Bank of Israel must provide solutions before it is too late."
Among other things, the mortgage consultants propose to allow borrowers to extend the mortgage period under the existing conditions without changing the interest rate, according to the format adopted by Bank Hapoalim, and to allow loans to be consolidated and spread within the mortgage up to 70% of the property's value.
"There is no reason for customers who fall short of the monthly payments not to be able to lower the monthly repayment by means of the loan cycle by pledging the property in their possession," states the association. "We are witnessing a flood of inquiries from customers and households who are having trouble meeting their mortgage payments. Along with the cost of living, which continues to rise, and in light of the fear that the Israeli economy is on the verge of a recession - the preparation of all relevant factors is required."
Looking ahead, the Association of Mortgage Advisors calls on the Bank of Israel to act to reduce early repayment fees, in a way that will allow households to increase their fixed interest rate mortgage without fear of a future penalty.
According to Central Bank economists, the inflation rate in the next four quarters is expected to be only 3%, compared to more than five percent today, when in 2024 inflation will drop to 2%, a rate that will be in the middle of the inflation target - 1% to 3% - set by the government. The governor added that "in the coming period, the forecasts show that the annual inflation will increase slightly before it starts to moderate and then decrease."
In addition, the Bank of Israel estimates that the basic interest rate will be 4% on average in the fourth quarter of 2023. Sharp interest rate increases have been recorded for a long time in Israel, as well as in most of the Western world, as part of the attempt to fight rising inflation in the shadow of the exit from the Corona crisis and the Russia-Ukraine war that disrupted the supply chains and skyrocketed energy prices. In Israel, the consumer price index jumped at an annual rate of 5.3% last November, and it is expected to continue to rise also in the December index, which will be published in about two weeks.
The Bank of Israel's decision comes after about two weeks ago the central bank in the USA (the Federal Reserve, or "the Fed") announced an additional interest rate increase of 0.5%. Thus, the interest rate in the world's leading economic power is currently in the range of 4.25%-4.5%.