“The minimal reduction of the interest rate does not match the challenges of the economy” – This is how Finance Minister Bezalel Smotrich attacked on Monday evening the Bank of Israel’s decision to lower the interest rate by a rate of 0.25% in a post he published on social networks, in which he revealed that he urged the central bank to carry out a much sharper reduction. Smotrich even claimed that an aggressive step is the correct way to ease the cost of living and to assist the high–tech and export sectors.
However, despite public pressure from the political echelon, the Monetary Committee of the Bank of Israel chose to act conservatively and announced, as stated, an interest rate reduction of only 0.25%, to a level of 3.5%. This is the second consecutive interest rate cut and the third since the beginning of the year, a move that signals a clear monetary trend change aimed at supporting the continued recovery of economic activity in the economy.
Blatant political interference of this type by the finance minister could have a heavy price in the international markets. The independence of the central bank is considered one of the pillars of the Israeli economy in the eyes of the global credit rating companies, which closely monitor what is happening in Jerusalem. Direct pressure on the governor regarding the level of the interest rate, which constitutes the “price of money,” could be interpreted globally as a severe institutional blow and consequently lead to a downgrade of the country’s credit rating.
The implications of such a move are a dramatic increase in the cost of raising government debt and scaring away foreign investors, precisely during a sensitive period when the economy is showing first signs of recovery after two and a half years of fighting, and the Bank of Israel Research Department even updated upward its growth forecast to 4% in 2026.
The decision of the Bank of Israel not to comply with the demands of the political echelon stemmed, according to the bank’s explanations, from responsibility and a desire to prevent a renewed outbreak of inflation. True, the signing of the memorandum of understanding between the United States and Iran led to a sharp drop of about 30% in oil prices and temporarily calmed the risk premium, but the Israeli economy still suffers from significant internal centers of pressure. The labor market continues to be very tight with only 3% unemployment, the average wage recorded a jump of 6.8% in March–May, the shekel weakened by 3.1% against the dollar since the previous decision, and the housing item – especially in contracts where a tenant changed – jumped by 6.8%. An overly aggressive reduction, as the finance minister demanded, could have, according to economists’ assessments, lost control over price stability.
While the argument at the top continues, for the general public, and especially for mortgage owners, the decision brings with it practical and immediate news on the ground. The monetary interest rate reduction rolls over directly to the prime rate. To understand the significance in numbers: For an average couple that took a mortgage in the amount of NIS 1,000,000, in which the prime component constitutes about a third of the total (about NIS 330,000) for a period of 25 years, the current interest rate reduction in the amount of 0.25% is expected to bring an immediate savings of about NIS 50–60 in the monthly repayment.
If one takes into account that this is already the third reduction since the beginning of the year, then the monthly repayment of that same couple has already decreased cumulatively by about NIS 150–180 every month. Beyond that, the move leads to a direct cheapening of other current loans and of overdraft costs in bank accounts, a step that assists in increasing the disposable income of citizens and encourages private consumption in the economy.
In the medium and long term, the cheapening of mortgages alongside a decrease in the financing costs of entrepreneurial companies are expected to inject liquidity and oxygen into the residential real estate market. The decrease in credit costs may return potential buyers to the market and thereby halt the decline in apartment prices, which increases the sense of wealth among the public but may make it difficult for first–time apartment buyers. Alongside this, the decrease in capitalization rates positively affects the value of companies on the stock exchange and increases credit sources, although it simultaneously makes savings channels and bank deposits less attractive for savers who are looking for investment alternatives.
Source:
www.jpost.com
