Israeli Banks Rapidly Cut Deposit Rates While Mortgage Rates Remain High

Recent data from Bank of Israel reveals that Israeli banks have quickly reduced interest rates on annual deposits following the central bank's rate cuts. In July, the average fixed deposit interest for periods between six months and one year dropped to 3.59%, down from 3.7% in June and 3.94% in April. However, significant disparities exist among banks, with One Zero Bank offering up to 6% interest on one-year deposits, while Masad Bank pays as low as 2.9%. Major banks Leumi and Hapoalim provide rates around 3.74% and 3.72%, respectively.

Despite falling deposit rates, mortgage interest rates have not decreased at the same pace. Banks have been increasing their mortgage interest margins, particularly on variable-rate loans linked to government bond yields, where spreads have risen from about 0.7% to between 1% and 1.3%. This strategy has partially offset the central bank's rate reductions, keeping mortgage costs relatively high.

Meanwhile, consumer loans tied to the prime rate have seen interest rates decline in line with the central bank's cuts. Average rates on these loans were 8.23% in July, with Hapoalim and Leumi offering 8.4% and 7.56%, respectively. However, there are wide variations, as Bank Jerusalem charges an average of 10.28%, while digital bank One Zero offers loans at 6.42%. The banking system holds a large amount of private customers' current account balances, approximately 233 billion shekels as of June, which earn minimal interest, limiting public benefit from higher deposit rates.

This mixed picture highlights the ongoing pressure within Israel's banking sector to balance profitability with customer returns amid changing monetary policy. The rapid pass-through of rate cuts to depositors contrasts with the slower adjustment of mortgage rates, reflecting banks' efforts to maintain lending margins.