Negative interest rate on Israel (in euros)

In July 2021, Bank Hapoalim began charging negative interest on Euro balances in its customers' accounts. With this, Hapoalim joins Bank Leumi, which started doing so back in 2018.

Negative interest rates seem strange. I "lend" the bank my money and they "charge" me for it? If that's the case, I don't want it, I don't need it! I'll keep the money myself. When you think about it that way, maybe it's not so simple. Where would I securely store 100,000 euro bills, close to 400,000 shekels? Under the bed? In a home safe? It's complicated and dangerous. You could be clever and rent a safe deposit box at the bank, but that's also problematic. In case of a break-in, the money isn't insured, and besides, various laws against cash usage would make it difficult for me to use this money.

Our arrangement with the bank is usually different. The bank allows us to put our money in its vaults for free, keeps this money, and guarantees that we can get it back at any time. In return, we allow the bank to lend out this money to others as long as we do not need it.

Imagine a parking lot in Tel Aviv. Let's say parking costs 40 shekels per hour. If we allowed the parking lot owner to rent out our car when we're at work and don't need it, they might let us park for free or even pay us for the right to park in their lot (and use our car when we don't need it). For this to work, the parking lot owner would need one of two agreements from us:

1. He was told when they are returning so he knows he can rent out our car for, say, only four hours.
2. We were told it doesn't really matter to us whether we take our car or another car from the lot when we arrive.

I suppose no one would agree to these terms, so we are doomed to keep paying for parking. When we deposit 1,000 shekels in the bank, we expect to receive 1,000 shekels, but we don’t care whether it’s in the same bills we deposited or not; therefore, the bank can lend our money to others when we don’t need it. If we come and ask for our 1,000 shekels, the bank will give us 1,000 shekels, identical in value, but in bills different from the ones we deposited, because the bank has long since given "our" bills to others. If we notify the bank in advance how long we promise not to ask for our money back, then not only can we keep it in the bank’s vaults, but the bank will even pay us for the right to lend our money to others in exchange for interest. Currently, deposits earn about 0.011% interest for short-term periods and slightly more if the deposit or savings plan is for a longer term.

So if the bank can use the money we deposit with them, why are they charging us for borrowing our money and even allowing them to do as they please with it? So, in the case of the euro, although we lent the money to the bank and gave them the right to use it as they wish, in the public's eyes it is a flawed commodity. Israel's economy is stronger than ever. We export much more than we import. This is called a surplus in the balance of payments. In fact, Israel's balance of payments surplus is The tallest in the world For countries whose economies are not commodity-based (oil, diamonds, coal, coffee, etc.). In this situation, banks can finance all the euro purchase needs of people who want to travel in Europe or, for example, car importers who want to purchase vehicles in Europe. Excess euros pile up in bank vaults with no one demanding them. All these analogies are, of course, true for the economy of the eighties and further back. Today, there are almost no banknotes 'piling up" but simply increasing numbers on various computers.

At some point, banks feel like suckers. They maintain expensive systems to safeguard currency that has no use, and because of this, they began charging a safekeeping fee for those who wish to store these coins with them.

As someone who has been following Israel's economy and politics with increasing awareness since the 1980s, I am amazed. I still remember the time when it was said that the country would run out of foreign currency and therefore wouldn't be able to finance the purchase of coal for electricity, etc. See the article in the Maariv newspaper from August 1984:

2.6 billion in 1984 is equivalent to 9.3 billion today. Israel's foreign exchange reserves As of June 2021, they are over $200 billion and growing at a rate of about $2 billion per month.

Why then does the bank charge those who deposit euros with them? Simple, it's a commodity that nobody wants to buy from the bank. If I deposited 1000 euros at Bank Hapoalim and it cannot lend this money as a loan to anyone, then it is providing me with a service for no compensation, and this causes it a loss. Therefore, from now on, the bank asks its customers to pay for the euro keeping service it provides them.

Anyone who remembers my article from the beginning of Corona On the price of oil It can be compared. In the same article, I wrote about cow dung. By all accounts, it's a stinky and polluting waste, and it's clear that dairy farmers will pay a lot to someone who will relieve them of its burden. However, when, for example, a power station is established that knows how to turn dung into electricity (such a station can be seen in Kibbutz Tel Yosef, where I grew up), suddenly not only are the dairy farmers not required to pay for the dung removed from their farms, but there is even someone willing to pay them for the dung and even transport it at their expense.

The expression "money has no smell" originated from the nonexistent sewers of Rome. The Romans would collect urine and use it for fertilizing fields. Emperor Vespasian, Titus's father, sought a source of revenue and decided to impose a tax on urine. His son Titus saw this as a disgraceful act, and was told by his father that it didn't matter where the collected money came from—money has no smell (Pecunia non olet). The same Vespasian began the siege of Jerusalem; his son Titus continued and destroyed Jerusalem, and both are remembered in Rome primarily for the urine tax. A certain historical justice.

This is precisely the process that led banks to impose negative interest rates on the storage of a currency that no one wants to take from them. Those who have been around remember the days in the eighties when the pound, and later the shekel, were currencies that no one wanted, and prices of many products were denominated in dollars. Negative interest on a significant currency like the euro in Israel is a great testament to the strength of the Israeli economy, whose citizens significantly prefer the shekel over the European continent's currency.

Since we've already touched on negative interest rates and interest rates in general, I've heard many argue that if low interest rates caused housing prices to rise, then all that's needed to lower housing prices is to raise interest rates. In short, as this is not the topic of the article, this claim is incorrect:

A. It is entirely incorrect to view the price of an apartment in isolation from the cost of the loan financing the purchase. An apartment that costs 1.5 million today might cost only 1 million shekels in a higher-interest-rate environment. But how much will the loan financing this purchase cost if, instead of a prime rate of 1.61%, we see a prime rate of 7.1% as in the past?

A small country whose entire livelihood depends almost entirely on exports and all of whose products are import-dependent (including the tomatoes that are supposedly grown here, but the tractor and fuel for the tractor are imported) cannot implement an interest rate policy different from the countries it trades with. It is no coincidence that the entire Western world has an interest rate environment close to zero.

As a side note, and as someone who has been watching the economy for years, I can say that perhaps today low interest rates seem like a bad thing to those who think they caused housing prices to rise (I disagree with that), but high interest rates were previously said to function like a reverse Robin Hood. It takes from the poor who pay a lot for their credit and gives the money to the rich who receive a lot for their deposits.

Before finishing

Reading newspapers from years ago was an experience. In general, people who think the situation is terrible, etc. Reading newspapers from not long ago provides good perspective. You can read the newspaper issue I wrote about at the link below. For reading other newspapers, I highly recommend the website of The National Library.

Among other things, I saw an advertisement in this newspaper from someone denouncing the National Religious Party for its intention to join a unity government with the Labor party. I think anyone who sees this advertisement will smile. I also saw an invitation to a memorial for Major Tuval Gvirztman, who was killed exactly two years earlier in the First Lebanon War. Tuval commanded an armored company in the 188th Brigade and after his death was posthumously awarded a commendation for his efforts to rescue casualties at the cost of his life. I continued writing the article while humming the song in memory of Tuval – Tuliq.

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