Bank of Israel Expected to Hold Interest Rates Despite Inflation Drop
Translated & summarized from Maariv by baba
Despite a drop in the consumer price index, the Bank of Israel is unlikely to cut interest rates soon, according to Psagot. The firm raised its inflation forecast and cited a weak shekel and political uncertainty as reasons. Mortgage holders face significantly higher monthly payments compared to 2019, and Psagot urges a rate cut to ease economic burdens.
The story in 5 lines · by baba
- Bank of Israel is expected to maintain interest rates despite a recent fall in the inflation index.
- Psagot raised its 12-month inflation forecast to 2.3% due to a weaker shekel and potential tax hikes.
- Mortgage payments are substantially higher, with a NIS 1.2 million loan costing over NIS 18,000 more annually than in 2019.
- Financial markets do not anticipate any interest rate reductions within the next year.
- Psagot urges a rate cut to provide economic relief to Israeli households and businesses.
Despite a recent decrease in the consumer price index, Bank of Israel Governor Amir Yaron is not expected to lower interest rates at the upcoming meeting, according to an analysis by Psagot. New data highlights the financial strain on mortgage holders and businesses, while calls for relief grow louder.
Psagot has raised its inflation forecast for the next 12 months to 2.3%, citing a weakening shekel, anticipated tax hikes following a new government formation, and potential fuel price increases due to reduced subsidies. They also point to expected interest rate hikes in developed countries and political uncertainty as factors complicating any rate cut by the Bank of Israel. The financial markets are not pricing in any rate reductions within the next year, and Psagot estimates the likelihood of a rate cut in this period is similar to the chance of a rate hike.
This outlook is unwelcome news for those hoping that the five previous quarter-point rate cuts signaled the start of a trend to ease the financial burden on households and businesses. The impact on mortgages is significant, with a NIS 1.2 million loan over 25 years at a 5.05% interest rate (the 2025 average) resulting in a monthly payment of approximately NIS 7,050. This compares to a monthly payment of about NIS 5,523 at a 2.73% interest rate (the 2019 average), a difference of roughly NIS 1,530 per month, or over NIS 18,000 annually.
While acknowledging recent credit cost reductions, Psagot argues that financing costs continue to hinder economic activity, a burden ultimately passed on to consumers. They also contend that the proximity of the upcoming election should not prevent a rate cut, citing four precedents where the Bank of Israel lowered rates between 15 and 29 days before elections, including a 0.75 percentage point cut in January 2009 during the global financial crisis.
Psagot asserts that even a minimal 0.25 percentage point reduction would be insufficient for Israeli citizens who continue to bear the monthly costs. They advocate for a rate cut to provide relief to families, the self-employed, and the overall Israeli economy.
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