A day after the Bank of Israel took everyone by surprise with its first interest rate hike in more than seven years, businesses and the financial markets were asking whether this was the beginning of a trend or a one-time step.
Banking and insurance shares, which rallied on the news Monday, continued higher on expectations that the higher rates would strongly boost their bottom lines. In the housing market, sources said the move would cool demand, and some denounced it as populist.
Economists were largely praising the decision by the Bank of Israel’s monetary committee to raise its base lending rate, effective Thursday, to 0.25% from the 0.1% record low in effect since 2015. The move was particularly unexpected because it was taken before incoming governor Amir Yaron takes office on December 24.
“In deciding to raise rates the monetary committee demonstrated impressive independence and (correctly) gave greater weight to the macro environment, where a zero interest rate is no longer appropriate, and lesser weight to personnel changes and the change of governors,” said Rafi Gozlan, chief economist at IBI Investment House.
He added that even with a higher lending rate and the base rate likely to rise at least to 1% by the end of next year, monetary policy remains expansionary.
Yossi Fraiman of Prico Risk Management said he expected further rate rises to be very gradual, noting that falling world oil prices would contain Israeli inflation.
“An increase in the shekel interest rate at a time when the United States has signaled it will slow down its rate of rate rises shows there’s potential to continue narrowing the interest rate differential between the shekel and the dollar, a trend that will contribute to the shekel’s strength and hurt the terms of trade for Israeli exporters,” he said.
The dollar and euro continued to weaken Tuesday. The greenback edged down to a representative rate of 3.7280 shekels from 3.737 before the rate hike. The euro lost 0.4% to 4.2191 versus 4.2495. Bond prices continued to slide, with the Tel Aviv Stock Exchange’s Tel-Bond 20 index closing 0.5% lower and the Tel-Bond 60 off 0.4%. Stocks moderately extended gains following sharp rises Monday.
Financial shares rose strongly on Monday on the rate news, with the TA-Banking index up 3% and the TA-Insurance-Plus index up 3.4%.
For Israel’s insurance companies, higher rates will let them reduce provisions they have to make due to the super-low interest rate environment. Banks will enjoy wider interest rate spreads between what they pay out to depositors and what they collect from borrowers.
“The current [rate] rise is very important in terms of contributing to bank profits and, of course, leads to an improvement in financial margins. The impact of the current rise we’ll see as soon as the coming quarter,” Dorin Zelnir-Palas, head of research at IBI, told TheMarker.
In the real estate market, the rate rise was greeted with less joy.
“Raising the interest rate was a populist maneuver by the acting governor, who wants to be remembered,” said Yehuda Katav, chairman of the Association of Contractors and Builders in Tel Aviv-Jaffa, referring to Nadine Baudot-Trajtenberg, the deputy governor who is heading the bank in the interim.
While Katav said he doubted that the Bank of Israel would raise rates again for the foreseeable future, this week’s move would put a chill over the real estate market by edging mortgage rates up.
Eran Carmel, chief executive of EWM Financing Solutions, said that under current regulations, a couple earning a combined 18,000 shekels ($4,830) a month and buying their first home now face a ceiling on monthly repayments of 5,940 shekels on a 1.3-million-shekel, 30-year-loan.
“An increase of 0.25 percentage point for a mortgage will reduce the maximum allowable mortgage that the couple can get by 100,000 shekels,” he said. “We expect to see a drop in the number of sales.”
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