How does the Bank of Israel determine how to fix the Prime Rate ?

How does the Bank of Israel determine how to fix the Prime Rate ?

How does the Bank of Israel determine how to fix the Prime Rate ?

The most common indicator for mortgages is the Consumer Price Index ( CPI) . The CPI is a measure of the change in prices of the 100 most common products. It measures the increase or decrease of these items. This information is published every 15th of the month by the Central Bureau of Statistics.  The changes are calculated in denominations of 0.1%.

israel inflation rate

 

The average annual inflation rate over the last 10 years between 2008 -2017 was about 1.5%. This is within the bank of Israel’s boundary of 1-3%. In the last year it fluctuated between -0.75% and 1.2% well within the Bank of Israel’s range.

If the Annual CPI increases that  is inflation.

If the Annual CPI decreases that is deflation.

The goal of the Israeli government is to keep the inflation rate between 1 and 3%, so that there will be a low inflation rate which stimulates economic growth.

The Bank of Israel determines the prime interest rate, and this effects the Consumer Price Index.

If the inflation rate is too low , than the Bank of Israel will lower the Bank of Israel Prime rate in order to encourage consumers to spend and invest more money. Furthermore, the lower the interest rate, the more likely that people will buy property and take out a mortgage, take out more bank loans and this will stimulate the economy. People will save less and they will not get a good return on their money.

On the other hand , if the inflation rate is too high, then the Bank of Israel will increase the Bank of Israel prime rate to discourage consumers from spending more money and investing. If the interest rates are higher, then people will stop borrowing money ,and instead save the money as they will get a higher return on their money.

So we see from here how the CPI and the Bank of Israel rate are inter-connected and how they effect each other.

 

 

How does the Bank of Israel determine how to fix the Prime Rate ?