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Bank of Israel raises interest rate to 3.75%, highest level since 2008

New Israeli Shekels (Photo: Shutterstock)

The Bank of Israel announced on Monday it is increasing the interest rate by fifty basis points to 3.75%. This is the seventh straight increase in interest rates since April of last year, and it is the highest level since 2008.

The central bank also adjusted its predictions for inflation, growth, and interest rates. The interest rate was revised up from 3.5% to 4% for this year compared to figures published in October. Due to the recent depreciation of the shekel, inflation is expected to reach 3%, up from 2.5%. At the same time, the GDP was cut from the previously stated 3% to 2.8%. 

The macroeconomic indicators, particularly the employment and consumption figures, show that inflation is not declining. Prof. Amir Yaron, the governor of the Bank of Israel, is particularly concerned about the ramifications of the upcoming public sector salary agreements, which are expected to become effective in January, as well as the agreements with political parties, which include an increase in budget expenditure of at least NIS 30 billion over the next twelve months.

At first glance, in comparison to other Western countries, Israel has mild inflation. Nevertheless, it remains at a fourteen-year high of 5.3%, exceeding the Bank of Israel's target of 1%-3%. While US inflation is currently over 7%, the country's CPI has been falling in recent months. However, despite high interest rate increases, inflation in Israel has not hit its peak, with core inflation continuing to rise.

According to experts, the latest interest rate hike will have a far greater detrimental impact on loan and mortgage recipients than on slowing the rate of inflation. With the most recent changes, an average mortgage of around one million shekels became 850 shekels per month more expensive, and this is only for the prime interest component (variable interest rate), which accounts for almost 40% of the loan. The indexation component must also be factored in, as it increased by 2.5% since the rate started rising back in April 2022.

Uriel Lin, the president of the Chambers of Commerce said, "The interest rate hikes severely harm tens of thousands of businesses and hundreds of thousands of households. They will be passed on to consumers and add to the cost of living."

This article originally posted here and is reposted with permission.

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