The Bank of Israel has been raising the benchmark interest rate steadily since April 2022, reaching 4.75% on May 22, 2023, in an attempt to curb inflationary pressures. This has allowed the country’s major banks, such as Bank Hapoalim and Bank Leumi, to increase their rates for borrowers and boost their net interest income, which is the difference between the interest they earn from loans and the interest they pay to depositors.
The banks have reported record net profits for the second quarter of 2023, thanks to the sharp rise in net interest income and the adjustment of their results to the rising inflation. Bank Hapoalim earned NIS 1.992 billion ($530 million) in the second quarter, a jump of about 43% compared to the same quarter last year. Bank Leumi saw its net profit soar by 75% to NIS 1.2 billion ($320 million) in the same period. The banks have also announced generous dividends to their shareholders.
Mortgage holders suffer from higher repayments
However, the high interest rates have also increased the cost of monthly mortgage repayments for many Israelis, who have taken out loans to buy homes in a market that has seen prices skyrocket in recent years. The average cost of monthly mortgage repayments has gone up by more than NIS 1,000 ($270) over the past year, putting a strain on many households.
Some lawmakers have proposed bills to freeze mortgage rates or cap them at a certain level, but these have been opposed by the Bank of Israel and the Finance Ministry, who argue that such interventions would harm the stability of the banking system and the independence of the central bank.
Finance minister proposes tax on banks’ excess profits
Instead, Finance Minister Bezalel Smotrich has suggested taxing the banks’ excess profits driven by the fast rise in interest rates. He said that such a tax would discourage the banks from exploiting the large interest rate differential and motivate them to pass on some of the benefits to their customers.
Smotrich said that he sees a “lot of logic” in introducing a high tax on the banks’ large excess profits, which he said are not a result of hard work and efficiency but of taking advantage of the situation. He said that this would be a better way to correct the distortion created by the interest rate differential and ease the burden on mortgage holders, without harming the stability of the banks and the independence of the Bank of Israel.
Bank of Israel urges banks to improve services
Meanwhile, Bank of Israel Governor Amir Yaron has urged the local banks to improve their services by actively offering interest-bearing deposits to their customers, instead of keeping them in low-yielding accounts. He also hinted at further rate increases in the future, saying that the central bank will continue to monitor inflation and economic developments closely.
Yaron said that the Bank of Israel is committed to maintaining price stability and supporting economic growth, while also preserving financial stability and ensuring fair competition in the banking sector. He said that he expects the banks to act responsibly and transparently towards their customers and shareholders.
