The Bank of Israel’s monetary committee, headed by Governor Professor Amir Yaron, raised the interest rate from 0.75% to 2.75%. This is the fifth consecutive rate hike by the Bank of Israel since April, when it raised the rate from its all-time low of 0.1% to 0.35%. Yaron predicts another year of higher interest rates than we are used to and insists the rate hikes are needed to contain rising inflation, which is already being felt.
Yaron told “Globes,” “According to the Monetary Committee, the Israeli economy has strong growth, a very tight labor market and a record employment rate. Inflation affects a wide range of elements, and at over time, more and more of these items are identified with high demand, which is why we continue the process of increasing the interest rate.
“Our estimates are that inflation will be between 4.5% and 5% until the end of the year, then a slow process of decline will begin. If all goes according to plan and all plans are subject to uncertainty, we expect inflation to enter the target range by the middle of next summer and could be further down towards the end of the summer. currently in a range that will start to dampen inflation, so it should rise above 3% in the future, and then inflation will start to move towards the center of the target range.”
The Bank of Israel’s annual inflation target range is between 1% and 3%, while inflation in Israel over the past 12 months is 4.6%. In its forecast today, the Bank of Israel’s research department predicted inflation of 4.6% in 2022, falling to 2.5% in 2023. The Bank of Israel forecasts inflation of 2. 7% in the four quarters to September 2023.
When do you think you can start reducing the interest rate?
“We see interest rates over 3% through the fall of 2023, or what the Bank of Israel’s research department has defined as the middle of the third quarter. You have to understand, we’re in a period of great uncertainty. We see that Europe is trying to deal with the energy crisis, and it is clear to us that there will be a slowdown and damage to activity in 2023. United, it is not yet clear whether there will be a soft or harder landing to affect the interest rate time horizon, let alone what geopolitical events we are witnessing that are factored into the forecast. An improvement in events could lead us to a situation where inflation will indeed moderate faster, but if we see effects in the opposite direction, such as very expansive wage settlements, this may further prolong the inflation process, which that will determine how long we re sterons in an interest rate environment above 3%.
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“It is clear to us that this is hurting quite a few businesses and households, and certainly through rising mortgage prices. On the one hand, we benefit from a rapidly growing economy, and we see the elements that affect inflation will ripple through to demand The acceleration and promotion of interest rate hikes that we have led should avoid the need for even higher interest rate hikes than what our research department predicts for the interest rate environment if we proceed more gradually with the current hikes.”
In the United States, it appears that the rate hikes have not hurt the public enough to slow consumption. Here, credit card spending is breaking records. How do you explain the discrepancy between complaints about the cost of living and rising mortgage payments and continued consumption?
“It also has a positive side – the Israeli economy has high consumption and activity. We see it in the labor market, when for every unemployed person there is at least one job vacancy. That is why, among other things , we pushed with the process (of raising rates), because we saw that the economy has the capacity to absorb it. The process of restricting interest rates takes time. At the point where we are now we see it, but in theory it takes several months and even up to six months until you see the effect of the process, which is why we are talking about the second quarter of 2023, where we will see the process express themselves more clearly.
How do you respond to those who claim that you started raising interest rates too slowly?
“When I talk about monetary contraction and monetary policy, I include interest rate decisions, exchange rate decisions and all the very rapid actions that we have taken to deal with Covid. There has been a major challenge here with an epidemic and get out of it. In June 2021, we ended all special programs and easing, things that other central banks did not do until 2022.
“You have to remember that our inflation has been lower and it’s still lower, and that’s a good thing. We don’t want to reach the type of inflation that they have elsewhere. There’s no doubt that the crisis between Ukraine and Russia has added oil to the inflationary fire and prolonged all the processes.That is why inflation here has also increased and that is why we have also accelerated the process of raising rates.When you look at our interest rate increases relative to the level of inflation and relative to the deviation from the inflation target, you see the Bank of Israel was actually among the first to act.”
As indicators for the third quarter of 2022 continue to predict a high level of activity, the Bank of Israel has revised growth forecasts for 2022 upwards and the Bank of Israel’s research department forecasts GDP growth by 6%. The Research Department expects GDP growth to moderate to 3% in 2023.
The research department said: “The expected slowdown in growth is due to expected moderations in global trade growth and GDP growth in advanced economies, as well as an increase in the real interest rate in Israel during the forecast period. The forecast reflects a higher level of activity in 2022-23 than the previous forecast, as shown by the upward revision to the projected deviation of GDP from trend.
Does the slowdown in Israel carry a risk of recession?
“We estimate that over the next few quarters, and certainly in the last quarter and possibly the first and second quarters of 2023, we will see a slowdown which, among other things, is partly affected by the rate hike process. But a large part of the effects that we take into account come from the forecasts of international organizations for Europe and the United States, as well as for international trade affected by China.
“It is of course undoubtedly a decline and a moderation in growth, but it must be remembered that this remains in an environment close to potential growth, and a high figure compared to what the we observe in Europe and the OECD speaks of 0.3% or 0.6% growth in the USA So yes, there is nothing to do because this is part of the moderation which is essential on the one hand by reality for inflation to fall, and on the other hand on an exogenous process which depends on both the crisis in Europe and the monetary tightening which takes place abroad.
Do you see the United States entering a recession?
“We are currently taking into account that there will be a slowdown, but we are still talking about some growth according to international organizations. By the way, in the latest data, for example according to the American Fed in Atlanta, we see data in the third quarter which is still good. But we believe that in order to rein in inflation and especially to the levels where it is there, and with the monetary tightening and the financial markets and what is happening in Europe, there will be a slowdown important. “
How to reduce the influence of the American market on Israel?
“The United States and Europe are of course important markets for the Israeli economy and this is part of what is included in the forecasts of the research department which speak of a growth of 6% in 2022 and 3 % in 2023. But it’s important to point out that the Israeli economy is still a strong economy that has shown its ability to grow, at least in the short term, and through everything we’ve seen in recent years.”
Finance Ministry Director General Ram Belinkov was interviewed by “Globes” two weeks ago and he disputed Yaron’s remarks that it is not his job to deal with house prices. He said it is incorrect “to say that there is no link between interest rates and prices in the economy in general. After all, the primary role of the Bank of Israel and central banks around the world is price stability in the economy.”
How do you respond to that?
“Everyone can have their own opinion. In fact, we have already pointed out in the Bank of Israel report that the interest rate environment contributes about a fifth of the increase in house prices. I have no doubt that the main component, both in our analysis and in discussions with the contractors, the people on the ground and the rest of the people involved, is the offer. This is the key and we see positive developments in the supply sector – more housing starts and permits This is key in the housing sector overtime.
“Granted, as interest rates rise they will continue to cool the market to one degree or another, but interest rate hikes cost households more and certainly young couples looking to enter this market. Even if the market cools down, they still end up with higher payouts.
“On the other hand, questions such as the ratio between monthly payments and income, or the amount of the loan in relation to the value of the property (LTV, which today amounts to up to 75% of the value of the property) are among the most demanding. We are constantly reviewing this, and we see no need to make them even more stringent, because ultimately such a step will prevent certain populations from being able to enter the market. So, with all due respect I owe you, I stand by my opinion that the key to a long-term solution in the housing market is of course on the supply side.”
Published by Globes, Israel business news – en.globes.co.il – October 4, 2022.
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