Tomorrow, the Governor of the Bank of Israel, Prof. Amir Yaron, will announce an increase in the interest rate in Israel to 0.25% or perhaps even 0.5%. Many times the public is in no hurry to link this step, which is seemingly understandable only to economists, to its financial situation, so we will try to give some emphasis that may shed light on the relevance of the step to the economic conduct of each of us.
First, a bit like real estate prices or inflation, here too it is a global phenomenon of which Israel is only a part (with differences that will be detailed soon).
In Israel, as in many other areas, they waited to see what the Americans would do – and only after the central interest rate was raised by Jerome Powell, chairman of the Federal Reserve, did they decide to act here as well, even though economists believed that interest rates could and should be raised. The Israeli even earlier, regardless of the steps of the American governor.
If one has to go for the broadest generalization, then one could say that the current wave of inflation came due to a meeting between cheap money, which naturally increases demand, and supply in short supply – mainly as a result of the long-term effects of the corona on production and freight rates. When the public is willing to pay more, prices go up.
The corona plague plagued the world after it further licked the wounds of the economic crisis of late 2008. To boost business and boost consumption, interest rates in Western countries have fallen to an unprecedented low. “Closing” money in interest-bearing investment channels has become less and less attractive – and there were even countries and financial institutions that offered a negative interest rate: do not want to spend your money? Great: Close it with us and get less in a few years …
Low interest rates managed to raise private consumption in many places, but goods were plentiful: factories (especially in China) worked overtime to meet demand, trading platforms no longer knew what to do with the money – and then came the corona.
Demand remains on the rise, but production stops altogether, slows down or becomes more expensive (with raw materials on one side and transportation on the other). This situation led to an inflationary jump. In Israel, a record of several years was broken, but relatively “we went out cheaply”, because in the United States, for example, inflation soared to a peak of 40 years.
Inflation takes people to the streets. Raising interest rate no
At the beginning of the Corona crisis, governments distributed money to citizens, that is, printed more money. The thought was correct: to satisfy the subsistence needs of those who are reluctantly, in their homes, for fear of infection and contagion. But with the spread of vaccines and the release of corona restrictions, prices began to rise, as mentioned.
Inflation, if you will, is like a tax that mainly hurts the weaker sections. When it raises the price of apartments and cars, okay (ostensibly). When it reaches the supermarket shelves, where everyone buys, even those whose spending on food consumes most of their income, social unrest begins.
Indeed, this is seen in various parts of the world – and the fear is that it will intensify for other reasons, such as the war between Russia and Ukraine that will affect the grain market (it already has an effect, but the effect will be felt more in the coming months). Because of the boycott on fuel supplies from Russia) and more.
Inflation, mainly because it harms the weaker sections first and foremost, is a recipe for social unrest, political instability and other things that the economy does not tolerate. That is, raising interest rates, beyond the economic terminology used to describe its effects, is first and foremost maintaining social stability. Mainly because those affected by it are mainly the middle class, the main credit consumer in the economy and in terms of political stability: the one who does not go out to burn tires in the squares and shout “work bread” even when it is harder for him to finish the month.
In Israel, meanwhile, although we are quite concerned about the cost of living, the impact so far has been moderate: inflation is higher than expected, but still not galloping – and it is highly doubtful that it will develop, the government intervened in rising energy prices ) And when state tax revenues break every record (mainly as a result of high-tech and real estate activity), the government has the ability to moderate the rise in prices even without being required to raise drastically the central bank.
Do you have a mortgage and also a minus in the bank? Watch injury!
The rise in interest rates seems moderate – and it is indeed so (which is also the assumption that the use of this measure in Israel will be relatively moderate), but it will still have consequences for the public.
Naturally, raising interest rates makes money more expensive. This means that it is beneficial for those who have capital in their hands and is detrimental to credit consumers. In Israel, credit consumption is reflected in two main channels: the mortgage market and the frameworks in bank accounts (which has earned the general title “overdraft”).
In other words: those who need money, both out of a mortgage obligation and through a credit line, loan or any other type of financial consumer, will pay more for the money.
It is true that a quarter of a percent – and even half a percent, sounds a little to some of us, but take a middle-class family that earns about 20-25 thousand shekels a month and is in the red at the bank. The same family – imaginary and still familiar to many of the readers – lived in an apartment worth two million shekels when about 1.3 million of them (about 66%) were obtained through a mortgage.
The same family will now pay many hundreds of shekels (depending on the level of immigration tomorrow) in the payment of their mortgage, even before we were required to minus. Naturally, it will consume less and thereby curb – so at least the central bank hopes – the rise in inflation.
It should be noted that even after raising the interest rate the money will remain relatively cheap, but many mortgage consumers, especially from the middle class (my dear son of the current government), who are the majority of high mortgage takers, will pay dearly for it.
Once we know how much the interest rate has risen, we can try and accurately calculate the impact of the move on credit consumers.
Source: Maariv.co.il – כלכלה בארץ by www.maariv.co.il.
*The article has been translated based on the content of Maariv.co.il – כלכלה בארץ by www.maariv.co.il. If there is any problem regarding the content, copyright, please leave a report below the article. We will try to process as quickly as possible to protect the rights of the author. Thank you very much!
*We just want readers to access information more quickly and easily with other multilingual content, instead of information only available in a certain language.
*We always respect the copyright of the content of the author and always include the original link of the source article.If the author disagrees, just leave the report below the article, the article will be edited or deleted at the request of the author. Thanks very much! Best regards!