For the second time this year, the Bank of Israel’s Monetary Committee has decided to maintain the interest rate at its current level, keeping the prime rate at 6%. “Beyond the security effects of the war, it has economic implications, both on real activity and on financial markets,” the resolution stated. The Mortgage Advisors Association noted, “Although there is no change in the prime component, the rest of the mortgage tracks are on the rise.”
By Assaf Kravitz, Nadlan Center
In accordance with assessments, the Bank of Israel’s Monetary Committee decided on Monday to keep the interest rate at its current level of 4.5 percent. The central bank refrained from cutting interest rates for the second time this year, maintaining the prime rate at 6%. The decision noted that “Israel has been at war for eight months. Beyond the security effects, the war has economic implications, both on real activity and on financial markets”. Referring to the housing market, the committee stated, “The increase in home prices continues, and the limitations and difficulties of activity in the sector in light of the war are still significant. The housing component of the Consumer Price Index (based on residential rents) increased by 0.6 percent, and the annual rate of increase is 2.7 percent.”
Earlier this year, at the beginning of April, the Bank of Israel’s Monetary Committee maintained the interest rate at 4.5 percent and the prime interest rate at around 6 percent. On January 1st, 2024, the Bank of Israel decided on its first reduction of 0.25 percentage points, lowering the interest rate from 4.75 percent to 4.5 percent. This decision followed a series of 10 consecutive interest rate increases between April 2022 and May 2023, during which the interest rate jumped from 0.1 percent to 4.75 percent.
In today’s decision, the Bank of Israel highlighted a rise in the inflation environment, reporting that inflation over the preceding 12 months was 2.8 percent. “Inflation expectations derived from various sources for the coming year have increased and are around the upper limit. Expectations for the second year and beyond remain within the target range but at the higher end.” Moreover, it was noted that since the last policy decision, the shekel strengthened by about 1.1 percent against both the dollar and the euro and by about 1.2 percent in terms of the nominal effective exchange rate.
“The data indicate an improvement in activity in the first quarter of the year, following a significant contraction in business activity with the outbreak of the war,” the decision added. “However, the activity level has not returned to its pre-war level and is primarily impacted by supply constraints. The ongoing geopolitical uncertainty is reflected in the high risk premium of the economy.”
— Bank of Israel’s Monetary Committee
The Mortgage Advisers Association responded to the decision, stating that “although there is no change in the prime component, most other mortgage tracks are on the rise.” The Association highlighted that since the beginning of January, there has been an increase of around 100 NIS in the monthly repayment and tens of thousands of shekels in the total mortgage cost due to rising funding costs. Additionally, the upward trend in mortgage repayment arrears continues. The Association urges the Banking Supervision Department to simplify the mortgage refinancing process.
