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The Bank of Israel's decision on Monday to raise its key interest rate for the first time since 2011 surprised investors, economists and capital markets, badysts saying the timing was wrong, Especially since the decision was taken by the central bank's monetary committee just before a new governor took office.
"What was the hurry," Yaniv Pagot, an economist and strategic strategist for Ayalon Group, an institutional investor, told The Times of Israel by telephone. "It's a bit like when mice play cat. There was no governor in charge, so they said let the process fly. "
Citing stronger inflation and strong economic growth, with full employment, the central bank on Monday raised its key policy rate by 0.15 point to 0.25%, after leaving it unchanged at a rate of record level of 0.1% since 2015. This new rate will come into effect on Thursday.
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The decision was made by the bank's monetary committee, headed by Deputy Governor Nadine Baudot-Trajtenberg, who is currently the head of the central bank. The new Governor of the Bank of Israel, Amir Yaron, will take office on 24 December.
Nadine Baudot-Trajtenberg, Deputy Governor of the Bank of Israel (screenshot of YouTube screen)
"We have come to the conclusion that conditions are ripe for a rate hike," Deputy Governor Nadine Baudot-Trajtenberg said in a Hebrew YouTube video published by the Bank of Israel. "It's a small increase," she said, but a "significant increase" because it occurs after almost four years, during which the rate remained unchanged at 0.1%.
The inflation rate has already returned to the target range of 1% to 3% set by the central bank, and the economy, even if it had recorded a "very moderate growth" in the last two quarters , continued to grow. "A beautiful rhythm."
"After a continuous rise in inflation since the beginning of 2018, the inflation rate is stabilizing slightly above the lower limit of the target range and is expected to remain within target limits in the months to come. to come, "said the central bank in a statement. statement explaining his decision.
Annual inflation stood at 1.2% in October, and "one-year forecasts and different sources hover around the 1% level," the central bank said in a statement.
Medium-term expectations remained anchored in the target range, the statement said. "Rising wages in the economy and expansionary fiscal policy will support further stabilization of inflation in the target. The main risk is the possibility of a strong appreciation of the shekel. "
The statement adds that while economic growth has slowed somewhat in the second and third quarters, "current activity indicators support the badessment that the economy is at full employment, and particularly the limited labor market data indicate strong demand.
Finance Professor Amir Yaron. (The Wharton School, University of Pennsylvania)
Baudot-Trajtenberg said the committee was well aware that the decision on the rate hike had been made without a governor at the helm but that data and economic badysis had led to the decision.
"The Monetary Committee was very conscious of the fact that we are in a period of transition," she said in the video. "We also discussed this," she said. "But as in all our other decisions, members of the Monetary Committee felt that decisions should be made only on the basis of data and economic badysis."
Why a rate hike now?
The Bank of Israel, like other central banks around the world, is responsible for maintaining price stability in the economy – thereby controlling inflation – to create a business environment conducive to economic growth. The central bank also subscribes to the other objectives of the government's economic policy, including economic growth, employment, reducing social gaps and supporting the stability of the financial system.
Price stability has been defined as an inflation target set by the government since 1992. The central bank's monetary policy aims to achieve this goal. To achieve the goal of inflation, the Bank of Israel sets the level of short-term interest rates. A low interest rate leads to inflationary pressures – and rising prices -, while an excessive rise in the interest rate leads to an excessive restriction of economic activity.
Since the 2008 financial crisis, considered the worst since the Great Depression of the 1930s, central banks around the world, including the Bank of Israel, have cut rates considerably to help grow their economies. Lower rates mean that the cost of borrowing is lower. This allows individuals and businesses to borrow more money – at lower cost – and to invest in the stock market, homes or machinery for their activities. This creates a training effect related to increased spending, which promotes economic growth.
Since the last rate hike in Israel in 2011, rates have fallen to a record 0.1% in 2015 and have remained at these levels until its rise on Monday. Other central banks have also raised their rates as economies around the world recover from the crisis. In the United States, the Federal Reserve has increased its rates since 2015.
The Israeli central bank believes that strengthening its economy and inflation in the target range justify a rate hike now.
Who will benefit from rising rates, who will suffer
The main beneficiaries of rising interest rates will be Israeli banks and financial institutions that derive income from cash loans.
Consumers who have money in savings accounts at the bank will also benefit from higher interest rates on their funds.
Those who need to borrow money – businesses or individuals – will now have to pay higher interest on the loans contracted, and this decision will mainly affect highly indebted industries, such as construction companies or private companies. holding companies.
Yaniv Pagot, economist and head of the Ayalon group's strategy. (Courtesy)
"The rate hike is not spectacular, but it could be the case if the trend continues," Pagot d'Ayalon said by phone. "It makes anyone who is mobilized more vulnerable. Businesses and consumers have forgotten what it means to pay significant interest on their debt. "
In fact, the shares of real estate companies and holding companies, which are heavily indebted, fell on Monday following the rate decision, while those of banks increased. The shekel, which had lost 3.2% against the dollar since the last decision on interest rates, rose 0.5% to 3.7120 to one dollar after Monday's announcement, according to the data compiled by Reuters.
An upward trend in interest rates could also lead to an appreciation of the shekel, and thus have a negative impact on Israeli exports, as the holding of shekels yields higher interest than before.
Interest rates will also increase for individuals who have loans in default or need new loans and those who have mortgages, with repayments that may increase depending on the type of loan they have.
The rate increase is minor and should not affect the financial statements of companies or individuals, said Dash Brokerage's Meitav in a note to investors. But this could change if the markets interpret this unique movement as a "trend". Long-term rates could also increase, the broker said. Mortgage rates were already rising before rising central bank rates.
"Higher mortgage rates will slow down the housing market and weigh on the economy as a whole, fueling the fire," said Amir Kahanovich, chief economist at Phoenix Insurance Company Ltd. & Excellence Nessuah Investment House Ltd. a note.
Lack of visibility
Only two of the 12 economists polled by Reuters had forecast a rate hike, while another 10 expected the rate to remain unchanged.
What made the decision even more surprising, said Gil Bufman, chief economist at Bank Leumi Le-Israel Ltd., in a note to investors by e-mail, is that in the last decision regarding On October 8, the central bank's economists revised their expectations to a rate hike, indicating that they were now expecting a rate hike only in the first quarter of 2019. , compared with the fourth quarter of 2018, given lower than expected inflation.
Gil Bufman, Chief Economist, Bank Leumi Le-Israel Ltd. (Courtesy)
"Since the last decision in early October, inflation expectations have fallen slightly, the price of oil has fallen by about 30% and growth data for the third quarter of the year were slightly below expectations. rising interest rates seemed somewhat confusing, "he wrote.
"Somewhat surprisingly, the reasons given by the bank for increasing the rate were the same as those it used in the past not to increase the rate", ie the fact that inflation is situated at the bottom of the target range, wrote Ofer Klein, director of the group. Department of Economics and Research Harel Insurance & Finance in a note. Even in this case, he said, he does not consider rate increases as a change of direction.
"The central bank will not hurry" to increase the rate in the coming months, due to slowing economic growth in the last two quarters, the expected slowdown in global economic growth and falling prices petrol. "one or two at most rate increase in 2019.
Ayalon Pagot said that managing the central bank's expectations was "unacceptable. There is no visibility with regard to monetary policy ", in contrast to Europe and the United States, where central banks have prepared the market in advance with their policies and policies. where "no one is surprised".
This visibility is all the more called into question as the new governor of the central bank takes office at the helm of the bank next month, he said.
"It's a black box for the market and we do not know about its monetary policy."
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