Can Israel’s interest rate hike reduce inflation?

Some Israeli economists have noted that it remains questionable whether Israel’s sharp increases in interest rates will be able to reduce inflation, saying the monetary policy may actually do more harm than good for the country.

After the Bank of Israel increased the rates seven times in a row, the base interest rate in the country has been lifted from 0.1 percent in April 2022 to 3.75 percent at present.

The latest increase, according to central bank governor Amir Yaron, was undertaken to bring inflation back to the government’s target range of 1 to 3 percent. Israel’s year-on-year inflation in November 2022 stood at 5.3 percent, the highest since 2008.

However, Amir Elalouf, a lecturer and researcher in the department of management at Bar-Ilan University, doubts the efficacy of the rate hikes despite their benefits.

“The economic situation is relatively good, and inflation in Israel is relatively not high, when interest hikes have caused anxiety and depression among payers of mortgages and other loans,” he explained.

High interest will favor big technology corporations with abundant cash, while young start-up businesses, which are crucial to the Israeli economy, still require financing and will now pay more money for it, Elalouf pointed out.

“The same goes for households. Those who have a lot of liquid cash will get more money from the new interest rates, while the middle class and the weaker ones who need money will now borrow more,” he added.

“The move strengthens the strong and harms the weak,” the Israeli researcher noted.

Despite the high interest rate that has reduced the number of mortgages accepted in Israel, price decreases in shopping malls, real estate offices, internet portals, and other sales locations in the country have yet to be witnessed, analysts said.

On the contrary, Israelis have experienced price rises across the board, including those for fuel, electricity, water, property taxes, and consumer items, while many households are dealing with higher mortgage payments, adding to the already strained spending power of ordinary families, they added.

Concerning the bank’s upcoming interest decision, the Manufacturers Association of Israel cautioned that a further increase will harm the industrial sector and the Israeli economy as a whole. Meanwhile, the Federation of Israeli Chambers of Commerce demanded the central bank formulate a broad plan to curb inflation together with the finance ministry instead of raising the interest rate once again.

However, Elalouf believes that the central bank would raise interest rates repeatedly until desired results are achieved, such as a decrease in home prices, saying it may be forced to turn to alternative strategies, such as thawing lands and eases for contractors, after unsuccessful interest hikes. ■

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