The Bank of Israel’s troubles are mounting. Among other things: the cabinet has approved a record call-up of reserve soldiers and is preparing for a large-scale campaign in the Gaza Strip; inflation has surprised negatively again and is above the upper limit of its annual target (3%) in contrast to most leading economies in the West; there has been an increase in mortgage arrears; there is also major uncertainty in the international arena due to Trump’s tariffs and the heavy US debt; and finally National Economic Council chairman Prof. Avi Simhon has accused the banks of causing rising housing prices.
In this situation, it is hard to see the Bank of Israel cutting interest rates anytime soon, and the big question is whether it will meet the aim it set in its most recent macroeconomic forecast – two interest rate cuts in 2025. In an interview with “Globes,” Bank of Israel Governor Prof. Amir Yaron addresses these burning issues.
Last month, a record number of mortgage arrears were recorded – NIS 3.6 billion. Are you concerned?
“The delinquency rate has risen slightly recently, but it is still considered low by any global standard,” Yaron explains. Currently, it is 0.6% of all mortgages. According to Yaron, one possible explanation is the way the calculation is done. “When you multiply this rate by the number of mortgages taken out in Israel, which has of course increased immeasurably, the number of delinquencies increases accordingly. Of course, we are monitoring this issue on an ongoing basis, so at the moment we do not see anything unusual on this matter.”
The response to Simhon
Yaron also spoke about the restrictions imposed by the Bank of Israel last month on the aggressive financing deals offered by developers and contractors. “The Supervisor (of Banks) published a draft temporary order according to which restrictions will be imposed on the banks’ capital allocations to apartment construction projects, in which at least 25% of the apartments were sold in discount operations (pay 20% now and 80% on completion). A step intended to reduce their momentum.”
You may have limited these operations, but on the ground you see that the contractors are finding ways around it, such as subsidizing the mortgage. How do you intend to act on this matter?
“Our main aim was first and foremost to intervene on the matter. We reduced the scale of these projects for the simple reason That when a person commits to the coming years after paying 10%, he does not know where the situation will go and whether he will be able to meet the obligations going forward. This is especially problematic today when projects take longer to materialize, which creates a lot of risk.
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“On the other hand, some of the offers are not the same case as the story of these promotions. Other moves, to the best of our knowledge, all involve a process of full underwriting. If there are such offers, but the borrower’s ability to meet the repayment is examined, this is less problematic for us. Our continued work is to monitor these promotions and examine the market.”
On the same topic, the team headed by Prof. Avi Simhon blames the banks and you for the increase in housing prices. Could there be something to these claims?
“First of all, I am not opposed to such an examination, the bank has no problem with examining the issue, assuming it is done in an orderly and professional manner. It’s hard to think that the price rises that have occurred here are not due to market supply and demand processes and the difficult and bureaucratic processes involved in creating housing in Israel. If I had to guess, we have not been the factor in the price increases in the housing market.”
The team led by Simhon also claims that there is a competitive failure as a result of the banking system’s requirements.
“The mechanism for providing guarantees and financing construction may sound technical, but it is important for home buyers. In the absence of such a mechanism, buyers are in danger in the event that the developer runs into difficulties. If you interfere with such a mechanism, it may have a negative impact. This is not a tomato, but a complex product. You have to be careful of a situation in which the buyer is in danger and financing costs will also increase.”
The question of interest rates
The interview with the Bank of Israel Governor takes place after he spoke at the Eli Hurvitz Conference on Economy and Society 2025. In his remarks, he presented that the increase in inflation, which reached an annual rate of 3.6% last month, is mainly due to supply constraints.
Due to the situation, do you still believe that you will be able to cut the interest rate twice in the coming year?
“We must remember that we are in a period of great uncertainty. It is not just about domestic events as was the case in the first year of the war, but it is also about global events. The scenarios and consequences resulting from what is happening in Israel and in the world raise a lot of question marks, as the results of these moves are sometimes contradictory. Therefore, it is difficult to estimate what will happen a year from now.”
Despite everything, Yaron believes that if there are no sharp changes in the geopolitical situation, inflation will return to the target range and then the interest rate can be cut. The main message from his words is clear: the Bank of Israel continues to monitor, analyze, and respond.
Published by Globes, Israel business news – en.globes.co.il – on May 27, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
