The Bank of Israel said that more measures might be needed to restrain the rise in home prices, according to the minutes of the narrow monetary forum meeting in late August, when the Bank of Israel decided to keep the interest rate for September unchanged at 1.75%.
The participants discussed two key issues: assessments about the real economy, and the housing market. They also discussed inflation developments and expectations.
The Bank of Israel noted that GDP rose by an annualized, seasonally adjusted 4.7% in the second quarter, after rising by 3.6% in the first quarter. Business product rose by an annualized 6%, mainly due to an annualized 15.8% growth in exports and steep annualized 8.7% growth in private consumption.
However, the participants expressed concern over the extent and strength of the global economic recovery, and specially the development of demand for Israel's exports, and the uncertainty regarding the expected rate of economic activity. The Research Department's forecast of 3.7% GDP growth in 2010, published in April, was consistent with some slowdown in the rate of growth in the second half of the year. The forecast will be updated next month, following the publication of the results of the labor force survey.
The participants also discussed the possible effects of expanded activity on real wages, and hence on prices.
The participants noted that the rapid increase in house prices (which are not included in the CPI) was continuing, and prices had risen by 2.2% in May, and by about 22 % in the last twelve months. This rapid increase is reflected in the widening gap between house prices and housing prices (which are measured by rentals and are included in the CPI), with the latter having increased by 5.6% in the last twelve months.
Referring to Supervisor of Banks Rony Hizkiyahu's tightening of mortgage requirements, the Bank of Israel said that it was still too early to assess effect of the macro-prudential steps that were implemented in July, and this could be done when data on the mortgage market became available for July and August. In light of the persistent trends in the housing market, it was suggested that further macro-prudential measures might be needed in this area. The participants said that, in addition to the effect of short-term interest rates on house prices, the decline in medium-term and long-term interest rates related to the decline in interest rates around the world is reflected in the reduction in the cost of financing house purchases, which boosts demand.
Published by Globes [online], Israel business news - www.globes-online.com - on September 6, 2010
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