Governor of the Bank of Israel Stanley Fischer will announce the interest rate for August on Monday. Union Bank of Israel (TASE: UNON) unit Impact Investment Management Ltd. says that if Fischer doesn’t raise the interest rate, he ought to.
Capital market inflation expectations are around 3% all along the curve, and the tip of the curve is actually over 3%, above the government's 1-3% inflation target.
Impact says, "Even if the market's inflation forecast is high, due to the technical factor of a surplus of deposits in index-linked instruments, and actual inflation is lower, we're still in a situation of a negative real interest rate, which does not suit the Israeli economy. Although interest rates around the world are not being raised, mainly due to the debt crisis in Europe, and this unquestionably influences the governor's considerations not to raise the interest rate, it should be remembered that inflation in the countries that Fischer looks at is negligible or negative. In other words, the real interest rate is not negative."
Impact adds that it is not the job of the Bank of Israel to deal with real estate prices, but since real estate prices affect the housing item of the CPI (accounting for 20% of it), so long as the interest rate remains negative, prices will continue to rise, albeit more slowly."
The lack of an alternative and cheap mortgages will continue to cause wealthy people to invest in real estate, for the simple reason that "there is nothing better to do with the money."
Published by Globes [online], Israel business news - www.globes-online.com - on July 22, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010