Get ready for more interest rate hikes

Avi Temkin

The Bank of Israel can be expected to raise the interest rate again next month.

The Bank of Israel has brought to the public's attention, and in particular the attention of the banks, the fact that it will not allow the real estate market to carry on heating up. This is what the central bank did yesterday, by raising the interest rate by 25 basis points, and today through the comments by Supervisor of Banks Rony Hizkiyahu.

However, the announcement to raise the annual rate to 1.75% must be examined within a broader context than the housing market. The press release from the central bank that accompanied the interest decision raises two main conclusions. The first is that the Bank of Israel is more concerned than it was two or three months ago by the level of inflation - to no small measure because of the rapid rise in the housing component of the Consumer Price Index (CPI). Inflation expectations are again rising and the forecast for the coming months is close to 3% per annum. Secondly, the Bank of Israel is less concerned today than it was two or three months ago at the significant slowdown in the growth of the economy.

These changes in the considerations of the central bank explain the difference in behavior between the second and third quarters this year. In the second quarter, the Bank of Israel's attention was focused on the crisis in Europe and the euro, which threatened exports, manufacturing and employment. As the weeks went by, and this fear receded, the Bank of Israel turned its attention back to the local market, and found worrying data regarding the scale of mortgages and the leverage contained in them. The Bank of Israel reached the conclusion that the time had come to send an explicit message to households and banks alike that it will not allow the bubble to develop nor will it permit deterioration in the quality of the banks' loan portfolios.

Alongside this message of concern, there is also a message expressing confidence that the economy is still on the track of growth, even if there are indications pointing to a fall in the pace of growth in productivity in the coming months. The bottom line is that the Bank of Israel sees a period of economic growth in the coming months Even if it cannot be determined that the danger of a renewed recession has passed, in Israel or worldwide, the risk has been reduced significantly. This is how many of those active in Israel's capital market have interpreted the Bank of Israel's announcement.

It can be assumed that from the viewpoint of capital market players, there is no likelihood of any "Israeli sub-prime crisis." This is because the Bank of Israel has taken the measures required to prevent it and anyway we are talking about something, which is relatively far in the future. Meanwhile, it is possible to enjoy high growth and the profitability of companies in the economy, and the fact that Europe is not dragging the world into crisis, and certainly not Israel, into the abyss of recession and unemployment.

This interpretation of the Bank of Israel's announcement relates to the past. The most significant question is if the central bank will see the need to act again and raise the interest rate next month. Past experience teaches us that a change in direction in monetary policy is undertaken gradually by the Governor of the Bank of Israel Prof. Stanley Fischer. If the Israeli economy is really expected to grow at the rate forecast several months ago, and if inflation, mortgage data and home prices do not reach levels that concern the Bank of Israel, then in four weeks time expect an additional rise in the rate of interest.

Published by Globes, Israel business news - - on July 27, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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