Interest Rate Cuts Prompt Shift in Israeli Savings Strategies

As the Bank of Israel has lowered its benchmark interest rate four times this year, bringing it down to 3.25%, Israelis are re-evaluating their savings options. While mortgage holders benefit from lower payments, traditional low-risk savings vehicles tied to interest rates are becoming less attractive. The two most prominent options, bank deposits and money market funds, have seen a surge in popularity among conservative investors in recent years.

Bank deposits are reflecting the rate cuts, with average interest rates for six-month to one-year terms dropping from 4.13% last July to around 3.59% as of July this year, even before the latest cut. While some banks like Bank Massad offered 2.9% and One Zero offered 6%, the average rates from major banks like Leumi and Hapoalim were around 3.74% and 3.72% respectively. A significant advantage of bank deposits is a guaranteed interest rate, but this comes at the cost of liquidity, as funds are locked in for a set period. Banks may also stipulate opening an account or transferring a salary to secure the best rates.

Money market funds, which invest in bank deposits and short-term corporate bonds, offer a more liquid alternative. However, their yields are also declining due to the falling interest rate environment. In the last quarter, these funds yielded between 0.8% and 0.95%, translating to an annualized rate of 3.2% to 3.8%. The Bank of Israel anticipates at least one more rate cut, which will further impact these yields.

A key difference lies in taxation: money market funds are subject to a 25% real capital gains tax, while bank deposits face a 15% nominal tax. This distinction is particularly relevant during periods of higher inflation, where the real return after inflation and tax can be significantly lower for money market funds. Ultimately, the best choice depends on individual needs for liquidity and the ability to lock in a rate before further reductions. For those who can commit their funds and secure an attractive fixed rate, a bank deposit might be preferable. Conversely, those prioritizing access to their money or concerned about inflation eroding their savings may find money market funds to be the more effective option.