US Interest Rate Hike's Ripple Effect on Israeli Savings and Mortgages Explained

A recent decision by the US Federal Reserve to raise interest rates can impact Israeli families' savings and financial planning, even without direct foreign trading accounts. This is because pension and severance funds are often invested in international markets, Israeli companies raise capital in US dollars, and exchange rates affect import costs and overseas expenses.

However, a US rate hike does not automatically translate to higher mortgage payments in Israel. The Bank of Israel sets local interest rates based on domestic inflation and economic conditions. The prime lending rate in Israel is tied to the Bank of Israel's rate plus a 1.5% spread. While the Fed's actions influence the broader economic environment, they do not directly alter the prime rate component of Israeli mortgages.

The US rate increase can influence the dollar's strength relative to the shekel. Higher US rates can make dollar-denominated assets more attractive, potentially strengthening the dollar. However, the shekel-dollar exchange rate is also affected by risk perception, investment flows, exports, and institutional investor activity.

For Israeli investors, the performance of foreign assets involves two components: the return in dollars and the dollar-to-shekel exchange rate at the time of measurement. A strong dollar return can be offset by a weakening dollar, and vice versa. Currency hedging can mitigate these fluctuations but incurs costs influenced by interest rate differentials.

A stronger dollar can also increase the shekel cost of dollar-priced goods and raw materials. If these increased costs are passed on to consumers, it could hinder inflation reduction efforts and indirectly influence the Bank of Israel's decisions.

The impact on existing mortgages depends on the specific loan terms. Changes in the Bank of Israel's rate affect the prime component. Fixed-rate loans are insulated from Fed decisions, while inflation-linked mortgages may change due to indexation. Variable-rate loans will see adjustments based on their specific reset terms.

For new mortgages, banks consider their own funding costs and borrower risk, meaning rates can change independently of the Bank of Israel's decisions. Loan-to-value ratios, borrower profiles, and negotiation also play a role.

For pension and severance savings, the impact varies based on the investment portfolio's composition, including the proportion of stocks, types of bonds, and currency exposure. Fluctuations in global stock and bond prices, as well as currency movements, affect the savings' value.

Even conservative investments like fixed-term deposits maintain their terms until maturity. Money market funds, however, can see their future yields gradually adjust to the prevailing interest rate environment. The choice between a deposit and a money market fund should consider the timing of fund usage and withdrawal options alongside potential returns.