The Bank of Israel’s interest rate currently stands at 3.25%, and will probably not stop there. The bank already talks openly of further rate hikes to 3.5%, and some analysts predict that it will reach 4%. Meanwhile, the Bank of Israel is exerting pressure on the banks to pass on the higher rates to depositors, by auctioning 3-month, six-month, and one year short-term loan certificates (makam) to the tune of NIS 38 billion.
It is estimated that these securities will give an annual return of over 3%, only slightly below the Bank of Israel’s key lending rate. In recent weeks, the Bank of Israel has used this tool several times, with the aim of improving the returns offered by money market funds, which represent an alternative to bank deposits, and of encouraging the public to save.
The Bank of Israel is mainly aiming at short-term bank deposits, which is where most of the public’s money is invested. The banks are currently offering very low interest rates on these deposits in comparison with rates on deposits for a year or more.
In offering the public the opportunity of buying makams directly, or indirectly through the money market funds, the Bank of Israel forces the banks to decide whether they want to raise the interest rates they pay on short-term deposits, in order to retain their customers, or to suffice with long-term deposits.
Governor of the Bank of Israel Amir Yaron said at a recent session of the Knesset Finance Committee, "I want to see the banks raise deposit interest rates, and faster." Yaron is now using the makam auction tool to bring that about.
Published by Globes, Israel business news - en.globes.co.il - on December 5, 2022.
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