Bank of Israel admits failure to tame inflation

Dror Marmor

In the announcement on its latest interest rate hike, the Bank of Israel acknowledges that it does not have the ability to control inflation.

Today's Bank of Israel rate hike was forecast by most economists. The big surprise and the big concern was that the Bank of Israel admitted the limits that the interest rate can achieve and the problems of using the interest rate in the war against the cost of living. In its report today, the Bank of Israel did not include the sentence, which has appeared in every previous interest rate hike announcement that "Inflationary expectations for all terms are within the target range."

The central bank, which is required by law to try and keep inflation between the 1% and 3% annual target range, has now presented a forecast of 3.9% for the end of 2023 - well above the upper limit of the range set by the government. That is to say that the Bank of Israel has admitted that it has lost the ability to control inflation, even while it is wielding its judgement day weapon - the interest rate that determines the price that we all pay to borrow money.

Despite the expected deviation above the target range, the Bank of Israel has not even made the effort to shock the economy into bringing inflation down to the target range, as it has tried to do in its recent decisions, in which it raised the interest rate by 0.5% or even 0.75% to dampen our appetite to consume, in the hope that it would cool down prices in the economy. The Bank of Israel well understands that the interest rate is a dangerous double-edged sword, despite the desperate desire to tame inflation.

Not that anything has been invented here. All over the world, central banks have grasped that the interest rate has exhausted itself. The collapse of banks in the US and Switzerland has reminded everyone that high interest rates place a huge burden on credit takers - and many patients may die during surgery. Here, too, the representatives of various economic sectors, especially from the real estate industry, have made it clear directly to the Governor of the Bank of Israel that the interest rate could bring many of them to the brink of bankruptcy. Deals done and land purchased under the assumption of an almost zero interest rate will have difficulty surviving over time with an average interest rate of 7% - certainly in a debt-heavy field like real estate.

Dangerous combination of high interest rates and sticky inflation

The really big concern is that we are currently 'stuck' wit high interest rates and inflation and no longer with efforts to promise that "the expectations" are for a return to a reasonable range.

For contractors and mortgage takers, most of whom face both index-linked loans and loans linked to prime (which has already reached 6%), this is most alarming news. The latest hike also guarantees, for example, that rents will increase (because who can afford an apartment here with such interest rates?), which will only further fuel inflation.

Published by Globes, Israel business news - - on April 3, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

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