The end of the cheap money era: the real meaning of raising interest rates

The Monetary Committee of the Bank of Israel, headed by the Governor of the Bank of Israel, Prof. Amir Yaron, announced a short time ago its decision to raise the Bank of Israel interest rate by 0.25%. The current interest rate of 0.1% will increase to 0.35% per year. This is the first change in interest rates since February 2020, when it was decided to lower the interest rate from 0.25% to 0.1%. The current interest rate will take effect on Thursday this week, three business days from the date of the decision.

Prof. Amir Yaron at the London Conference. Photo: The Jerusalem Post

It is difficult to call the decision an earthquake. After all, the rise in interest rates came after the world’s leading governors raised interest rates, inflation in Israel rose and all analysts expected a rise. According to the Bank of Israel’s economic forecast, GDP is expected to grow by 5.5% this year, which is the highest level of growth. However the increase was at the upper end of expectations.

The conservative Governor of the Bank of Israel also came to the conclusion that the Israeli economy has stabilized and even more so, the corona is behind us, inflation is raising its head (relatively modest for the world) and therefore demand should be moderated to calm price rises. The importance of the decision is not only in actually raising but in changing the trend. After more than a decade of zero interest rates, cheap money and sometimes negative returns on the money in some of the bonds, the Bank of Israel signaled yesterday that the celebration would end.

Governor of the Bank of Israel Prof. Amir Yaron (Photo: Reuters)
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And that’s not all. The Bank of Israel’s interest rate will continue to rise and is expected to reach 1.5% per year by the end of the year. The Bank of Israel interest rate plus the banking margin (which stands at 1.5%) will increase the prime interest rate to 1.85% per year. This interest rate is particularly relevant to the interest rate on mortgages linked to the prime interest rate. The interest rate on mortgages will rise automatically and this is bad news for borrowers. However, the loans for the purchase of a car or any other bank loan that was linked to the prime will also become more expensive.

Those who may suffer from this are not only private but also business customers. Former Economy Minister Eli Cohen attacks the decision: “In the war on housing prices, raising interest rates is like fuel for a fire. It will not be effective in lowering housing prices and will hurt mortgage borrowers. The main axis for lowering housing prices is stopping land speculation.”

Unsurprisingly, the president of the Independent Organization, Adv. Roi Cohen, also strongly opposes the decision and believes that while businesses are in difficulties, this is not the time to raise interest rates. And the decision also has effects on the financial markets and especially the stock market. Expectations of raising interest rates have already led to price declines in long-term bonds. In the future, they are also expected to have a negative effect on what is happening in the stock market. Trading on the stock exchange took place today with price declines of more than half a percent.


Source: Maariv.co.il – כלכלה בארץ by www.maariv.co.il.

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