The decision by Bank of Israel Governor David Klein to cut the key interest rate by 2 percent, expected to be officially announced today, will have some immediate effects on average citizens.
The good news for those with overdrawn checking accounts is that interest on overdrafts is expected to go down by 2 percent, too, as will the interest charged by credit card companies on credit card loans. Interest on other loans linked to the prime rate will also go down.
But those who have been squirreling away money in savings accounts or had planned to do so shortly stand to lose from Klein's move. Banks will reduce the interest yields on short-term shekel savings accounts (pakam daily, weekly and monthly accounts), although medium-term and long-term savings accounts are not likely to be immediately affected because these kinds of accounts are affected by activity in the bond market, and not only by the decisions of the central bank. In the coming days, banks are likely to reduce the interest rate they offer on savings accounts linked to the consumer price index by 1 percent or perhaps a bit more.
Short-term mortgages (of up to two years) will become cheaper. It will some weeks until we feel the effect on long-term mortgages, which are also likely to drop their rates.
The bond market will be affected by the government's need to raise more cash to cover its operations.
To judge by activity at the end of the week after the impending change was made public, the foreign currency market is likely to be volatile in coming days. The reduction in the interest rate reduces the gap between the interest rate in Israel and the rate in the United States, thereby increasing the attractiveness of investment in dollars. The key question in such a situation is what will be the level of the devaluation of the shekel. The greater the devaluation of the shekel (in other words, the more shekels needed to buy a dollar), the greater the risk of an increase in the consumer price index, in which case the Bank of Israel is likely to raise interest rates again to prevent sudden inflation.
Banking experts don't expect the dollar to rise much above 4.40 shekels, in other words, a small devaluation that will make investment in CPI-linked shekel savings accounts attractive.
With lower yields on savings accounts, the stock market could become more attractive to some investors, although the global economic downturn mitigates against such investments.
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