Israel raises interest rates in eighth consecutive hike in 10 months

TEL AVIV — The Monetary Committee of the Bank of Israel raised interest rates by 0.5% on Monday. The decision by Bank of Israel Gov. Amir Yaron marked the eighth consecutive hike since April 2022, bringing it to 4.25% — the highest level since 2008.

The rate hike reflects the bank’s deep concern over the risk posed by rising inflation — now at a 20-year high of 5.4% — to Israel’s economy.

Addressing the decision, Yaron explained that the 0.5% increase exceeded the central bank’s own 2023 forecast due to the unexpected 0.3% rise in the January consumer price index. “The CPI surprised us and everyone in the market. Equally important, core inflation seems to be sticking around and the decision takes into account the balance between the risk of inflation and of activity slowdown,” he told the financial newspaper Globes.

“Our main role and responsibility is to make sure that inflation does not increase and does not cause damage to the economy,” Yaron continued.

“Price stability is a basic condition for a stable and growing economy, and the interest rate tool is the one we use. Before taking any steps, we examine the world of mortgages and know that it hurts, but you cannot lower inflation without this pain and we will continue to work to eliminate it,” he noted when asked about the burden of rising interest rates, especially on mortgage borrowers.

Nonetheless, Yaron said he was confident the stubborn inflation would be tamed. “We see from the data that the Israeli economy has a high level of activity and employment is high and even increased at the end of the year. … Despite the CPI surprise, inflation expectations show that we will return to the target range (1%-3%) at the end of this year or beginning of 2024.”

Indeed, the Israeli economy, which weathered the 2008 global subprime crisis and coronavirus pandemic of recent years, does not appear at significant risk precisely for the reasons that contributed to galloping inflation: increased demand for Israeli products and impressive 6.5% gross domestic product growth in 2022.

Meanwhile, the Israeli shekel, one of the most stable currencies in the world, has depreciated at a rapid pace over the past month from 3.36 shekels to the US dollar a month ago to 3.6 shekels on Feb. 21. This decline may also indicate reduced market confidence in the Israeli currency as a result of the highly controversial judicial overhaul being fast-tracked by the government.

According to Bank of Israel data, the average monthly mortgage repayment of an Israeli family has increased by almost 1,000 shekels ($277) since the wave of interest rate hikes began.

The Israel Mortgage Consultants Association has warned that the significant increase has brought the repayment ratio of many households closer to 40% of their monthly income, a threshold that is considered risky given potential repayment difficulties over time. The association called on the Bank of Israel to make this consideration a top priority.

The banks, meanwhile, are trying to make things easier for mortgage borrowers.

Discount Bank, for example, has announced that it will allow customers to reduce their monthly mortgage repayment to the September 2022 level, prior to the last four interest rate increases. Mizrahi-Tefahot Bank and First International Bank of Israel also announced new repayment options.

In addition to the inflation challenge, Yaron is facing political pressure from government coalition parties unhappy with the impact of the rate hike on their voters, especially given their pledge prior to the November 2022 elections to reduce the cost of living, including mortgage interest rates. The latest increase even prompted Foreign Minister Eli Cohen of the Likud party to demand a curb on the central bank’s independence.

Posting on Twitter, Cohen wrote that he had asked Finance Minister Bezalel Smotrich to formulate a road map along with the central bank governor to suspend further interest rate increases. However, Prime Minister Benjamin Netanyahu, realizing the damaging potential of such ideas, was quick to respond. "The Bank of Israel Law was passed under my leadership, and it guarantees the independence of the Monetary Committee headed by the governor in setting the interest rate. Nothing will change that," Netanyahu said in a statement.

Yaron thus remains independent, but he will likely think long and hard about his next interest rate decision.