Israel warns high-interest rate may impact growth

Reuters/Ronen Zvulun

The Bank of Israel on Wednesday warned of risks to the stability of the banking system due to possible economic consequences from the government’s plan to overhaul the judiciary, as well as higher credit costs from a steep rise in interest rates.

In its semi-annual report on financial stability, the central bank said that Israel’s banks and insurance companies remain stable, citing the buffers built up by households and companies during the Covid-19 crisis that had increased their resilience to potential shocks.

But it cautioned over rate hikes – in which policymakers have boosted the benchmark rate to 4.75 percent from 0.1 percent in April 2022 – aimed at battling persistent inflation.

The banking regulator said the tightening and moderation of growth “were reflected in an increase in risks in both the real estate and financial markets, and in an increase in credit costs. In view of this, households and businesses are dealing with a heavier debt servicing burden.”

It also pointed to the controversial government plan to trim the Supreme Court’s powers – a move that has ignited mass protests since the beginning of the year – as creating uncertainty over the judicial system, on the functioning of the economy and the financial system in general.

“If these processes — in Israel and abroad — intensify, they may pose a challenge to the system in the medium term,” the central bank said.

It added that the repayment capacity of both households and the business sector remains strong. But regarding credit businesses, companies in the real estate and construction industry — a major industry in terms of the financial system’s exposures — posed increased risk.