Israeli Finance Minister Calls for Urgent Interest Rate Cuts Amid Mortgage Repayment Struggles
Israeli Finance Minister Bezalel Smotrich responded to the Bank of Israel governor's decision to keep interest rates unchanged, highlighting the economic challenges facing the country. Inflation expectations for the coming year stand at 1.4%, slightly above Smotrich's forecast, with annual inflation at 1.5% as of July, the lowest since May 2021. Despite this decline, the central bank's interest rate dropped only marginally from 4.75% to 3.5% during the same period, resulting in a high real interest rate of 1.97%, which Smotrich argues is hindering economic growth, especially after the ongoing war.
Smotrich urged the Bank of Israel to reduce interest rates before the upcoming Knesset elections on October 27, suggesting possible rate cuts on August 31 and October 21. He emphasized that further inflation data is expected to show continued declines, which should compel the monetary committee to lower rates. The high real interest rate contrasts with other economies like South Korea and European countries, where rates are negative or near zero, and complicates Israel's economic recovery.
The article also notes the difficulties in the housing market, with over 84,000 unsold apartments representing a 26-month supply at current sales rates. The construction sector is struggling due to falling land prices, rising import costs from currency fluctuations, and reduced government subsidies. Mortgage borrowers increasingly face repayment challenges, with some extending loan terms to manage payments. Investment in housing dropped 12.6% in the first half of the year compared to 2023.
Additionally, the Israeli banking sector has reported massive profits of 78 billion shekels over the past two and a half years, with returns on equity exceeding 15%. Smotrich criticizes the banks for imposing high interest rates on businesses and households, calling for immediate rate cuts to alleviate public burden. He also links high rates and economic pressures to a net emigration of approximately 125,000 people since early 2023, driven by judicial reforms, tax burdens, military reserve demands, and housing costs.
Finally, Smotrich stresses the importance of transparency in the Bank of Israel's monetary committee decisions to avoid perceptions of political bias. The committee currently includes Governor Amir Yaron and several public members, with one vacancy remaining. The article underscores the urgency of interest rate reductions to support economic stability and growth in Israel amid complex domestic and international challenges.
