The major banks estimate raising the liquidity rate will seriously damage foreign currency-linked deposits, primarily of new immigrants, exporters, Holocaust survivors and foreign investors. The banks assessed a proposal being drafted by Bank of Israel to raise the liquidity rate of shekel and foreign currency-linked deposits.
Bank of Israel intends to raise the proposal for debate in its advisory committee tomorrow, in order to receive response to the proposal before a final decision is made. According to the proposal, the liquidity rate for short-term shekel deposits of less than one year, and foreign currency deposits, will be raised by about 5%. In the instance of foreign currency deposits, it is possible the rate will be determined according to shekel interest rates, instead of dollar interest. The significance of the proposal is a drop in interest paid on shekel deposits of 0.5-0.75% for short-term deposits and up to 1.2% on deposits of one-year. The decrease in interest paid on foreign currency-linked deposits will reach about 1%.
The move is designated to reduce the money supply in the economy and absorb surplus liquidity on the market, as the result of the large government injections resulting from funding the large budget deficit deviation. According to Bank of Israel data, government injections to fund the budget deficit amounted to a record NIS 8 billion last year. The money supply in the economy increased 13% in that period.
Liquidity rates are currently 6% for deposits of up to one week and 3% for deposits for deposits of one week through one year. Deposits for longer periods of time than one year have no liquidity requirement. If the liquidity requirements are raised, they will be 8% and 11% respectively.
The major banks estimate the change will result in the absorption of up to NIS 5 billion through shekel deposits, and NIS 3 billion from foreign currency-linked deposits.