Coalition pauses interest rate bill, backing down to central bank pressure

Government to reevaluate after banks next week propose own plans for better consumer terms; Bank of Israel governor had called bill a ‘serious blow’ to central bank independence

Bank of Israel Governor Amir Yaron arrives at a cabinet meeting on the state budget at the Prime Minister's Office in Jerusalem, February 23, 2023. (Alex Kolomoisky/Pool)
Bank of Israel Governor Amir Yaron arrives at a cabinet meeting on the state budget at the Prime Minister's Office in Jerusalem, February 23, 2023. (Alex Kolomoisky/Pool)

The coalition on Wednesday froze a bill that would let the Finance Ministry intervene in setting interest rates paid to consumer checking accounts, after the Bank of Israel governor slammed the proposed measure as a “serious blow” to the central bank’s independence.

Bank of Israel governor Amir Yaron last week asked commercial banks to develop plans for bettering terms for their customers. Responses from the banks are expected next week, after which the coalition will reevaluate its decision to pause the bill, said a spokesperson for Shas MK Yinon Azoulay, who sponsored the effort.

A government panel threw the coalition’s weight behind the bill on Sunday, and the bill was originally expected to come for its first Knesset vote on Wednesday.

The legislation was cast as part of the Shas party’s socioeconomic platform, and was intended to force banks to share interest profits with consumers.

In order to do so, the bill proposed that interest rates paid on checking accounts would be determined not by commercial banks, but by the Bank of Israel governor, subject to the finance minister’s approval.

In a strongly worded letter sent Tuesday to Prime Minister Benjamin Netanyahu, Yaron warned that such legislation would infringe on the central bank’s ability to conduct monetary policy, as it would give the finance minister the authority to actually influence the interest rate.

Shas MK Yinon Azoulay speaks during a Knesset House Committee debate, January 17, 2023. (Olivier Fitoussi/Flash90)

“I am strongly opposed to intervention in the pricing of banking products and to setting a uniform price,” wrote Yaron.

“Setting a price harms the activity of the market mechanisms, causes all the players to gather around the set price and thus suppresses competition and efficiency,” his letter continued.

Netanyahu, Shas party leader MK Aryeh Deri, and coalition whip MK Ofir Katz agreed together to hold off on advancing Azoulay’s bill, said Azoulay’s spokesperson.

Following the publication of Yaron’s letter, the Tel Aviv Stock Exchange’s benchmark TA-125 index and the TA-35 index of blue-chip companies closed down more than 1% on Tuesday. The shekel depreciated about 1%.

Shas leader MK Aryeh Deri and Prime Minister Benjamin Netanyahu seen during a Shas party meeting at the Knesset in Jerusalem on January 23, 2023. (Yonatan Sindel/Flash90)

“The violation of the central bank’s independence embodied in the bill crosses a red line, and there is real concern that international entities and credit rating agencies will also perceive it that way,” Yaron wrote to Netanyahu.

The proposed legislation came after Yaron last week summoned the CEOs of the country’s banks to his office in Tel Aviv to discuss interest rate policies on deposits, current accounts, and loans. The central bank head ordered Israel’s lenders, which have been enjoying huge profits from higher interest rates, to pass on those rates to customers and start paying interest on funds sitting in checking accounts aka current accounts.

The public has about NIS 1.4 trillion in local-currency bank deposits, of which more than NIS 500 billion is sitting in checking accounts, according to the Bank of Israel.

Depositors rarely receive interest on these balances, but the banks generate interest income from them, as the Bank of Israel has steadily hiked the benchmark interest rate over the past year from a record low of 0.1% in April 2022 to 4.75% this year to try and cool inflationary pressure.

Israeli banks have in recent months come under fire for not fairly passing on or being slow in passing on the benefits of higher interest rates to deposit holders, while fully profiting from the fruits of high rates on loans and mortgages.

The interest rate that banks charge Israelis who take out household loans averages around 10%, while rates on deposits average between 2% and 4.5% depending on size and duration.

The discrepancy, which has been fueling the banks’ hefty profits, has been causing outrage among the general public and some politicians in recent months, who have been accusing Yaron of causing damage to the economy.

Yaron has also been attacked by some members of Netanyahu’s hardline coalition for warning of the negative impact of the judicial overhaul on the nation’s finances.

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